Annual report 2007 - Pharmstandard · annual report 2007 1 Annual report 2007 3 01 Introduction 4...
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Transcript of Annual report 2007 - Pharmstandard · annual report 2007 1 Annual report 2007 3 01 Introduction 4...
1annual report 2007
Annual report 2007
3 01 Introduction
4 Significant events and awards in 2007
6 Highlights6 Financial & Business Highlights
7 pharmstandard achievments in 2007
8 Shareholders Highlights
9 Investor relations
10 Corporate governance
15 letter from the Ceo
17 02 Business report
18 Market overview
25 Business overview26 Sales and marketing
27 Manufacturing
27 Strategy
30 products
35 recent launches and near-term pipeline of pharmaceutical products
37 Sales and Marketing
38 Medical equipment and disposables
38 Manufacturing and Facilities
40 Distribution
41 employees
42 risk Management
45 03 Management’s Discussion and Analysis of Financial Condition and Results Of Operations development
46 Introduction
47 results of operations
52 trends affecting our results of operations in 2007
53 liquidity and Capital resources
55 Quantitative and Qualitative Disclosures about Market risk
59 04 Consolidated Financial Statements
60 Independent auditors’ report 62 Consolidated Balance Sheet
64 Consolidated Statement of operations
65 Consolidated Statement of Cash Flows
67 Consolidated Statement of Changes in equity
69 notes to the Consolidated Financial Statements
111 05 Contacts
2
I welcome the opportunity to introduce to you the first annual report of oJSC pharmstandard for 2007. It was a very important period in pharmstandard’s life, as we became a london listed company, and we appreciate the trust our investors have placed in us. In my opinion, we have justified and responded to your confidence and expectations for 2007 reflected by a market capitalization increase of more than 80% since flotation
Introduction01
3annual report 2007
SIgnIfIcAnt eventS And AwArdS In 2007
01 Introduction
January “Pharmstadnard-Leksredstva” started production of Flukostat® (anti-fungal product) acquired from Masterlek company in August 2006.
April The Company’s leading brand Arbidol won “Platinum Ounce 2006” award as the best non-prescription product in the Russian pharmaceutical market. In 2007 Arbidol became a leader of commercial segment in Russia.
May on 4th of May oJSC “pharmstandard” successfully completed its Ipo and placed 43% of its share capital to the international and domestic institutional investors. Company shares were granted listing at MISeX and rtS (Moscow). pharmstandard GDrs got listing at london Stock exchange. Market capitalization of the company during initial offering achieved $2.2 billion.
July Pharmstandard and Solvey Pharma (France) signed a long-term agreement on manufacturing two products IRS®19 and Imudon® in Russia. Production line will be constructed in Tomskhimpharm (Tomsk). Start of production is planed in Q3 2008.
September “Pharmstadnard-Leksredstva” started production of Arbidol® (capsules) acquired from Masterlek company in August 2006. In-house production should decrease production costs and derive positive effect to the Company EBITDA margin.
November Pharmstandard GDR’s has been included in MSCI Index (with weight 0.47% in MSCI Russia and 0.04% in MSCI EM).
December Pharmstandard won prestigious award “Company of the Year 2007” as a leading domestic pharmaceutical company.
December “Pharmstandard – Leksredstva” – one of the biggest pharmaceutical production plants in Russia celebrated 85th anniversary.
December In 2007 Pharmstandard became the leader of commercial segment at the Russian pharmaceutical market and entered top 3 companies of the market overall.
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>>
4
Events after the accounting periodPharmstandard won three “Platinum Ounce” awards in 2007: ■
Pharmstandard won “Company of the Year 2007 Platinum Once”
award as the best domestic pharmaceutical company in Russia
Arbidol – the Company’s leading brand won “Platinum Ounce
2007” award as the best non-prescription product in the Russian
pharmaceutical market.
Rastan® won “Breakthrough of the year 2007” award as the most
technological new product launched in 2007 in Russia.
In January 2008 OJSC Pharmstandard acquired 19,88% shares of ■
«DIPAKA TRAIDING LIMITED» (Cyprus), which owns 100% shares
of Russian pharmaceutical company Mir-pharm and several
patents and trademarks, including Mexiprim®. Mir-pharm is Rus-
sian highly technological API producer and holds research base
for drugs and APIs development. According to contract with
Mir-pharm Pharmstandard accomplishes exclusive distribution
and promotion of Mexiprim®. In future Pharmstandard plans to
use Mir-pharm R&D resources for development and production
of drugs and APIs.
In February 2008 Pharmstandard and Grindex (Latvia) signed ■
long-term collaboration agreement about Mildronate® prod-
uct. According to Agreement “Pharmstandard” will accomplish
exclusive distribution and promotion of Mildronate® prepara-
tion in Russian Federation form 01 February 2008. Agreement
anticipates possibility of the drug production at Pharmstandard
facilities.
In March 2008 changes in beneficiary’s structure of Pharmstan- ■
dard’s largest shareholder. Mr. V. Kharitonin and Mr. E. Kulkov
acquired an additional 17% stake of Augment Investments
Limited previously owned by Mr. R. Abramovich, Mr. E. Shvidler
and structures affiliated with the management of Millhouse LLC.
In April 2008 Pharmstandard won “Best IPO 2007” award in ■
frame of 4th Russian IPO congress organized by Institute of
Financial Markets and Management (Russia).
In May 2008 Pharmstandard granted FSFM permission for ad- ■
ditional 5% of shares to float outside Russian Federation in form
of GDR.
Rast
an® a
nd A
rbid
ol®
Winn
ers o
f “Pla
tinum
Oun
ce” a
ward
s in 2
007
5annual report 2007 | \\... 01 NtroDuctIoN
HIgHlIgHtS
01 Introduction >>
6
financial & Business Highlights
2007 IFrS 2006 IFrS Growth2007 vs 2006
2006 pro-Forma1
Growth 2007 vs 2006
pro-Forma
(rur mln) (rur mln) (rur mln)
Revenue 11,371 8,523 +33% 9,374 +21%
Gross profit 6,852 4,942 +39% 5,233 +31%
EBITDA 4,882 3,255 +50% 3,496 +40%
Net income 3,263 2,036 +60% 2,006 +63%
EPS 86.34 50.21
1 Pro-Forma assumes inclusion of MasterLek as part of Pharmstandard as of 1 January 2006
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
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4.09
.200
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4.10
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val
ue
In v
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4.11
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4.12
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.200
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4.02
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8
4.03
.200
8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
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4.07
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4.03
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8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
Strong margins
Total sales
EBITDA
Net Profit
Sustainable revenue growth (as % of sales)
Gross profit
EBITDA
Net profit
In A
pril
2008
Pha
rmst
anda
rd w
on “B
est I
PO 2
007”
aw
ard
in fr
ame
of 4
th
Russ
ian
IPO
con
gres
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gani
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by In
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arke
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Man
agem
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Russ
ia)
7annual report 2007 | \\... 01 NtroDuctIoN
Pharmstandard achievments in 2007
Became a leading domestic pharmaceutical company in Russia (measured by sales):
#3 pharma company overall in Russia ■
#1 pharma company in the commercial segment ■
Significant growth in sales and profitability: ■
Revenue growth +33% and achieved $445 mln ■
Gross profit groth +39% and achieved $268 mln or 60% of sales ■
EBITDA growth +50% and achieved $191 mln or 43% of sales ■
Net profit growth + 60% and achieved $ 128 mln or 29% of sales ■
Market leading brands and new launches:Arbidol is a leader of Russian Consumer spending pharma mar- ■
ket (measured by sales)
6 brands among top-20 best selling domestic brands in Russia ■
Launched 10 new products – $ 13,7 mln or 3% of total sales ■
New long-term projects and acquisitions:Co-рroduction contract with Solvay Pharma (IRS®19, Imudon®) ■
Acquisition 20% of Mir-Pharm company (R&D base for future ■
development)
Exclusive sales contract with Grindex ( Mildronate® ) in Russia ■
Successful completion of Masterlek integration ■
Shareholders HighlightsOJSC Pharmstandard placed its shares on RTS, MICEX and GDRs
on LSE since IPO in May 4, 2007. The offering structure was:
25.0% of share capital in form of GDR on LSE (offer price US$14.55) ■
18.3% of share capital in form of ordinary shares on RTS ■
and MICEX (offer price US$58.20)
Pharmstandard ownership structure as of 27 June 2008
(%)
Augment Investments Limited 54.2%
Free Float 46.8%
LSE (in form of GDR) 27.5%
RTS, MICEX (ordinary shares) 18.3%
HIgHlIgHtS
01 Introduction>>
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7In
val
ue
In v
olum
e
In v
alue
In v
olum
e
4.11
.200
7
4.12
.200
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.200
8
4.02
.200
8
4.03
.200
8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7In
val
ue
In v
olum
e
In v
alue
In v
olum
e
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
Pharmstandard gdr price on the lSe to ftSe global Pharmaceuticals and ftSeurofirst 300 Pharmaceuticals Indexes
Pharmstandard
FTSE Global Pharmaceuticals
FTSEurofirst 300 – Pharmaceuticals
MSCI Pharmaceuticals Index
Ordinary shares performance at the rtS compared to rtS Index
PHST
RTSI
8
Investor relationsSince May 2007, when Company became a public and placed
it’s shares on RTS and MICEX in Russia and GDR’s on LSE, the Company
provided audited reports on a semi-annual basis. Starting from year
2007 we implemented practice to issue also quarterly non-audited
trade updates for our shareholders.
We publish our Annual Report including audited figures by the
date of Annual General Meeting. The AGM of the Company takes place
in Moscow and formal notification is sent to shareholders at least four
weeks in advance of the meeting. Managing Director makes a busi-
ness presentation in accordance with Russian legislation requirements
to the AGM and all Directors are available during the meeting for the
questions.
Management of the Company and investor relation staff are
open for dialogues about Company plans and objectives and maintain
relationships with institutional shareholders through a conferences,
regular conference calls and meetings and 2 roadshows in 2007
Roadshows in 2007April 23 – May 4 ■
IPo roadshow
(Moscow, London, Frankfurt, Stockholm, New-York, Boston)
September 24–28 ■
Non-deal roadshow
(London, Frankfurt, New-York)
Conferences in 2007
December, 18 Moscow Alfa Bank “Consumer Focus Day”
December, 10-11 London Merrill Lynch “Russia & New Frontiers Forum”
November, 16 Moscow UBS “Russia Consumer Conference”
September, 27-28 New-York UBS “Global Life Science Conference”
September, 18 Moscow UBS Group Seminar
Man
agem
ent o
f the
Com
pany
and
inve
stor
rela
tion
staff
are
ope
n fo
r dia
logu
es a
bout
Com
pany
pla
ns
and
obje
ctiv
es a
nd m
aint
ain
rela
tions
hips
with
in
stitu
tiona
l sha
reho
lder
s th
roug
h a
conf
eren
ces,
regu
lar c
onfe
renc
e ca
lls a
nd m
eetin
gs a
nd
2 ro
adsh
ows
in 2
007
9annual report 2007 | \\... 01 NtroDuctIoN
Covering Analysts
Aton Management Anna Kochkina
Citigroup Marat Ibragimov
Goldman Sachs International Mlada Yegikyan
ING Robert Kerekes
J.P. Morgan Elena Jouronova
Kapital Investment Marina Samohvalova
Merrill Lynch Odile Lange-Broussy
Merrill Lynch Andreas Schmidt
Renaissance Capital Natasha Zagvozdina
UBS Svetlana Sukhanova
Investor Relations department of the Company locates in head-
quarter in Moscow and acts as a central point for contact with institu-
tional shareholders. (Phone: +7 (495) 970 00 30, e-mail: [email protected])
corporate governanceOJSC Pharmstandard comply in all material respects with
Russian corporate governance practices which are applicable to us.
Throughout 2007 OJSC Pharmstadnard has complied fully with ethical
standards and acted according to requirements of the London Stock
Exchange.
The company’s governing bodies are:
the General Meeting, ■
the Board of Directors ■
Annual General MeetingThe Annual General Meeting is the highest decision-making
body of the Company, comprising all shareholders.
The Annual General Meeting will be held at Petrovka str 11/20,
Moscow, Russia, Marriot Aurora Hotel, “Stoleshniki” conference room at
10.00 am Moscow time on 27 June 2008.
HIgHlIgHtS
01 Introduction>>
10
Board of directors
Viktor KhArItoNIN (1972) Mr. Kharitonin has served as chairman of our board of directors since May 2006. He served as general director of LLC Profit House from 1997 through 2003, and currently serves as an executive director of LLC Pharmstandard and as a director of Croydon Partners Limited and PHS Russian Holdings (Lux) S.ar.l. Mr. Kharitonin graduated from the Novosibirsk State University.
Igor KryloV (1964) Mr. Krylov has served as a member of our board of directors since May 2006. Mr. Krylov has more than 12 years experience working in the pharmaceutical industry and previously held positions with Eli Lilly and Aventis. He graduated with honours from the Kyrov Military Medical Academy.
Egor KulKoV (1971) Mr. Kulkov has served as a member of our board of directors since May 2006. Mr. Kulkov has held a number of senior financial positions in various companies, and currently serves as head of the operational department at Commercial Bank Aresbank and as a general director at each of LLC Gloverton and Mellot Intertrade Corporation. He graduated from the Novosibirsk State University.
Pavel MIlEyKo (1972) Mr. Mileyko has served as a member of our board of directors since May 2006. Prior to June 2005, he served as general director of LLC Maknetiktrans. Since January 2007, he served as an assistant to the executive director of LLC Pharmstandard. Mr. Mileyko graduated from the Novosibirsk State University.
olga PoKroVSKAyA (1969) Ms. Pokrovskaya has served as a member of our board of directors since October 2006. She also serves as a member of the board of directors of Evraz Group S.A. She has more than 15 years of financial experience and previously served as Head of Corporate Finance of OJSC Sibneft from 1998 through 2006. She currently serves as Head of Corporate Finance of LLC Millhouse. Ms. Pokrovskaya graduated from the State Financial Academy and holds a certified public accountant’s certificate.
Natalia PAVloVA (1973) Ms. Pavlova has served as a member of our board of directors since October 2006. She also serves as a member of the board of directors of OJSC Alpari and as Chairman of the board of directors of OJSC Registrator R.O.S.T. where, prior to joining LLC Millhouse in 2003, she served as Head of Issuer Services. She currently serves as Head of Corporate Department at LLC Millhouse. Ms. Pavlova graduated from the Moscow State University.
11annual report 2007 | \\... 01 NtroDuctIoN
Natalia MAMchENKo (1974) Ms. Mamchenko has served as a member of our board of directors since October 2006. She has previously held various managerial positions in the financial sector at OJSC Sibneft, with the government of Chukotka and at LLC Millhouse. Ms. Mamchenko serves as Vice Head of the Finance and Budget Department at LLC Millhouse. She graduated from the State Financial Academy.
Alexander MElNIKoV (1968) Mr. Melnikov has served as a member of our board of directors since October 2006. He has previously held various managerial positions with OJSC Sibneft from 1999 through 2002. Since 2002, he has served as the Head of Assets and Investment Department of LLC Millhouse. Mr. Melnikov graduated from the Moscow State Technical University.
Ivan tyryShKIN (1973) Mr. Tyryshkin has served as an independent member of our board of directors since October 2006. He also serves as a member of the board of directors of OJSC RTS. He previously served as President of NP RTS from 2001 to 2003 and as President of CJSC Russkoe Zerno from 2003 to 2004. Since 2006, he has served as both a managing director and a general director of LLC ATON. Mr. Tyryshkin graduated from the Russia Economic Academy.
Senior Management
Igor KryloV (1964) Mr. Krylov has served as a Chief Executive Officer. Mr. Krylov has more than 12 years experience working in the pharmaceutical industry and previously held positions with Eli Lilly and Aventis. He graduated with honours from the Kyrov Military Medical Academy.
Elena ArKhANgElSKAyA (1970) Ms. Arkhangelskaya has served as our Chief Financial Officer since 2003. She has 10 years experience working in the pharmaceutical industry and previously held senior positions at Eli Lilly. Ms. Arkhangelskaya graduated from the State Financial Academy and has obtained a master of business administration degree from the American Institute of Business and Economics.
olga MEDNIKoVA (1969) Ms. Mednikova has served as our Chief Sales and Marketing Officer since 2004. She has 12 years experience working in the healthcare industry and previously held senior management positions in marketing and promotion at Glaxo Wellcome and IVAX. Ms. Mednikova graduated from the State Medical University in Samara and holds a MD PhD.
Board of directors (continue)
HIgHlIgHtS
01 Introduction>>
12
Sergey DuShElIKhINSKy (1971) Mr. Dushelikhinsky has served as our Chief Commercial Officer since 2005. He has 10 years experience in sales and 9 years experience serving in supervising positions, and previously worked for CJSC Veropharm and FTK Vremya. Mr. Dushelikhinsky graduated from the Moscow Technical University.
Sergey PyltSyN (1956) Mr. Pyltsyn has served as our Chief Human Resources Officer since 2003. He has nine years experience in the pharmaceutical industry, and, from 1997 to 2000, worked for Eli Lilly where he held senior management positions. Mr. Pyltsyn graduated from the Rostov State Medical University.
Viktor FEDlyuK (1973) Mr. Fedluk has served as our Head of Legal Department since 2003. He has nine years of experience in the legal profession, and worked for JSC Sibneft from 1996 to 2003. Mr. Fedluk graduated from the Ukraine National Legislation Academy.
Maxim StEtSyuK (1977) Mr. Stetsuk has served as our Head of Investor Relations and Business Development since 2005. He has eight years of experience in the pharmaceutical industry, and previously worked for Abbott Labs and Eli Lilly. Mr. Stetsuk graduated from the State Academy of Management.
Audit CommitteeOur audit committee consists of Mr. Tyryshkin, Mr. Mileyko and
Ms. Pokrovskaya. The committee is chaired by an independent direc-
tor, Mr. Tyryshkin. The audit committee is authorised to carry out the
following functions relating to the control of our financial and business
operations:
to evaluate our potential auditors and to prepare recommenda- ■
tions for our board of directors in connection with the election
of the auditor;
to draft the agreement to be entered into with auditors and to ■
prepare recommendations for our board of directors on the fees
of auditors;
to review the scope and results of auditor procedures and their ■
financial efficiency and assess the opinion of the auditors; and
to review our financial statements and analyse all changes in ac- ■
counting policies and practice or any material corrections made
upon an audit and make appropriate reports and recommenda-
tions to our board of directors.
13annual report 2007 | \\... 01 NtroDuctIoN
Remuneration and Nomination CommitteeOur remuneration and nomination committee consists of Mr.
Tyryshkin, Ms. Mamchenko and Mr. Kulkov. The committee is chaired
by Mr. Tyryshkin. The committee assists the board of directors with the
development of our remuneration and benefits policies, elaborates the
remuneration system for the members of the board of directors as well
as our General Director, considers and interviews potential new mem-
bers of the board of directors and a nominee for the General Director’s
position and makes recommendations to our board of directors with
respect to these matters.
Corporate CodeThe corporate code sets out internal control procedures for our
financial and business operations. The Corporate Code specifies the
procedures for (i) the internal control of our financial and business op-
erations and (ii) the functions of, and procedures for, our internal audit
service with respect to compliance with internal controls and (iii) the
procedures for our internal audit service with respect to compliance
with internal controls.
In addition, the Corporate Code regulates the use of insider
information by our management and employees. Thus, the Corporate
Code provides that members of our board of directors, General Direc-
tor and our internal and external auditors shall use insider information
(as such term is defined in the Corporate Code) only for our benefit,
pursuant to applicable law and in accordance with the Corporate
Code. The Corporate Code also provides for certain procedures that we
can implement in order to ensure compliance by all relevant individu-
als with such regulation.
The Corporate Code also establishes a requirement for the
members of our board of directors and the General Director to disclose
any trading in our shares.
DividendThe Board of Directors recommends not to pay dividends for
the year ended December 31, 2007 as there is a big chance for the
following M&A deal which Company prefer to cover from it’s free cash-
flow.
HIgHlIgHtS
01 Introduction>>
14
I welcome the opportunity to introduce to you the first Annual
Report of OJSC Pharmstandard for 2007. It was a very important
period in Pharmstandard’s life, as we became a London listed
company, and we appreciate the trust our investors have placed in us.
In my opinion, we have justified and responded to your confidence
and expectations for 2007 reflected by a market capitalization increase
of more than 80% since flotation.
We have achieved our goals in 2007 as a result of the mutual
endeavors of all Pharmstandard’s team and our focus on the current
strategy. We became one of the top three pharmaceutical companies
in the Russian market by sales. Our growth in 2007 was primarily at-
tributable to organic growth as well as non-organic. We successfully
integrated Masterlek into our business and benefited from the result-
ing significant synergies. We developed and launched 10 new prod-
ucts. We built a strong marketing and sales force team and increased
significantly our market share.
Pharmstandard is today not only the biggest domestic phar-
maceutical company by sales but also enjoys one of the largest and
modern production facilities in the Russian market. We will continue to
follow our strategy to consolidate our position in the pharmaceutical
market as well as grow through promoting our market leading brands
and launching new products.
I look to the future with confidence that Pharmstandard con-
tinues to demonstrate profitable business growth and delivering long
term value for our shareholders.
To the best knowledge of the members of the Board of Directors:
(a) the consolidated financial statements set out on pages
60 to 109 have been prepared in accordance with IFRS, give
a true and fair view of the assets, liabilities, financial posi-
tion and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole; and
(b) the business and performance review set out on pages
18 to 43 includes a fair review of the development and per-
formance of the business and the position of the Company
and the undertakings included in the consolidation taken
as a whole, together with a description of the principal risks
and uncertainties that the Company faces.
letter frOm tHe ceO
01 Introduction >>
For and on behalf
of the Board of Directors
Sincerely yours,
Igor KryloV
15annual report 2007 | \\... 01 NtroDuctIoN
16
Business report02
17annual report 2007
the russian market is continuing to develop in terms of the breakdown of pharmaceutical product consumption and increase of pharmaceutical product consumption per capita.
mArket OvervIew
“ T he past year has given food for thought for both opti-
mists and pessimists as it was a record-setting year in
terms of investment raised by the Russian pharmaceuti-
cal industry. Over the course of the year several M&A deals were con-
cluded in the market, including, the ownership of Akrikhin changing
hands several times and Makiz Pharma being added to STADA’s Russian
assets. Additionally, the market saw Servier constructing new facilities
in Russia at a high tempo. However, all the above was outshone by
Pharmstandard’s IPO. Investors had been on the lookout for a Russian
pharmaceutical wonder COMPANY, and judging by Pharmstandard’s
stock price dynamics we are living through this wonder. Pharmstan-
dard has also involved itself in the M&A field when it acquired the
Russian company Masterlek, as well as the completion of the moderni-
sation of its facilities in Kursk where the manufacturing capacity from
the closed St. Petersburg enterprise Pharmstandard-October and other
closed plants was relocated.”*
Russian Pharmaceutical MarketThe Russian market is continuing to develop in terms of the
breakdown of pharmaceutical product consumption and increase of
pharmaceutical product consumption per capita. The state-supported
sector decreased the absolute market value without however affect-
ing the overall demand, as the retail market experienced customers
continuing to purchase efficacious and thus more expensive drugs.
However, the Russian pharmaceutical market in 2007 declined from
the aggressive growth rate, demonstrated since 2005.
There were a number of transitional developments in the
pharmaceutical sector including a coverage of 2006 FRP (Federal
Reimbursement Program) debts which were finally paid and changes
in regulation and financing of the FRP with implementation of the
decentralization of pharmaceutical products purchasing from federal
to the regional level.
Due to weakening of the U.S. dollar, which is traditionally the
main currency used for calculating the Russian market by market
research agencies, including Pharmexpert, the market picture was
distorted.
* The Russian Pharmaceutical market, 2007 results, Pharmexpert, Market Research Center
02 Business report >>
18
According to Pharmexpert, the Russian pharmaceutical market
amounted to $11.38 billion in 2007 in retail prices, an increase of 6%
compared to 2006, including a 16% growth in the commercial seg-
ment (consumer spending segment) and a 20% decline in the FRP
segment.
Based on the result of 2007, Pharmexpert forecasts the market
to reach $13.5 billion in 2008, a growth rate of 19%, which is below
their previous forecast of $15.5 billion based on results of 2006. The
difference between the new and previous forecasts is due to the
decline of the FRP in 2007 and the forecast of the same level of budget
spending for the FRP in 2008 as 2007. Pharmexpert forecasts commer-
cial segment growth in 2008 to be at least at the same rate as in 2007.
Additionally Pharmexpert forecasts the Russian pharmaceutical market
to reach $22.25 billion in 2012.
DSM forecasts the Russian pharmaceutical market to reach
$13.4 billion in 2008 and $20.6 billion in 2012.
Market structureThe Russian pharmaceutical market comprises three major seg-
ments, namely the commercial market (consumer spending market),
the FRP market (Federal reimbursement program) and the hospital
market. According to the results of 2007 the commercial segment
makes up 69% of the market, the FRP segment 18% and the hospital
segment13% vs. 63%, 23%, and 14% respectively in 2006.
The following table illustrates the breakdown of sales (in con-
sumer prices) and sales growth in 2007 and 2006 by pharmaceutical
segment (US$ billion).
Segment 2006 $billion Growth, % 2007 $billion Growth, %
Commercial 6.7 20% 7.8 16%
FRP 2.5 79% 2.0 -20%
Hospital 1.5 7% 1.6 5%
total 10.7 28% 11.4 6%
The commercial segment of the Russian pharmaceutical market
reached $7.8 billion up 16% in value as compared to 2006. The FRP has
been implemented since 2005 within the frame work of the National
Priority Project “Zdorovie” (Health). Its main objective was centralized
The
Russ
ian
phar
mac
eutic
al m
arke
t am
ount
ed to
$1
1.38
bill
ion
in 2
007
in re
tail
pric
es, a
n in
crea
se o
f 6%
com
pare
d to
200
6, in
clud
ing
a 16
% g
row
th in
the
com
mer
cial
seg
men
t (co
nsum
er s
pend
ing
segm
ent)
an
d a
20%
dec
line
in th
e FR
P se
gmen
t.
19annual report 2007 | 02 BuSINESS rEPort \\... MArKEt oVErVIEw
drug provision to specified population categories. In 2007 $2.0 billion
worth of drugs (at “substituted” prices) were distributed within the FRP
framework.
The hospital segment has reached $1.58 billion in 2007 with
5% growth vs. 2006.
Generic products are more widely utilized than original prod-
ucts in Russia since they are more affordable to both consumers and
the Government, which bears a large portion of the expense.
The following table illustrate market structure of generic and
original products in each market segment by value (%).
Segment Generics original
Commercial 92% 8%
FRP 75% 25%
Hospital 83% 17%
In terms of product origin, domestically manufactured phar-
maceutical products historically have exceeded imported products in
volume terms. Domestic manufacturers have to date focused primarily
on generic products, as they require lower initial investment than origi-
nal products and addressed the demand for more affordable drugs for
end users and payers.
According to Pharmexpert, in 2007 domestic products ac-
counted for the 84% of total sales by volume and 16% of total sales by
value, whilst imported products accounted for the remaining 16% and
84% respectively.
All pharmaceuticals products sold in Russian market can
be broadly categorized as prescription or OTC (Over-the-Counter)
products. According to Pharmexpert, in 2007 prescription products
accounted for 63% of the market and OTC for 37% of the market in
sales value terms and 34% and 66% of the market in volume terms
respectively.
mArket OvervIew
02 Business report>>
20
Commercial segment The commercial segment continued to grow in 2007 experi-
encing 16% growth. In 2007, for the first time, the top 10 corporations
rankings in the commercial segment was headed by Pharmstandard.
The changes to the dynamics of the commercial segment structure
by Rx/ОТС drugs is related to the development of the reimbursement
program. When this program was launched in 2005 the share of Rx
drugs in the commercial segment decreased, as many of them started
being provided to the beneficiaries within the program’s framework. In
2006, when many beneficiaries left the program and started purchas-
ing drugs on their own at drugstores the share of Rx drugs in drugstore
sales increased. In 2007, the ratio kept shifting towards Rx drugs be-
cause still less beneficiaries remained in the reimbursement program,
and many of those remaining had to pay for the drugs themselves in
order not to terminate their treatment course.
The share of the commercial segment between Russian and
foreign manufactures has been stable since 2004.
rx\Otc ratio (%) in the commercial segment of the russian pharmaceutical market in value (US$) and volume (packs), 2004–2007
OTC
Rx
ratio of imported and local drugs (%) in commercial sector of russian pharma-ceutical market in value (US$) and volume (packs), 2004–2007
Imported
Local
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7In
val
ue
In v
olum
e
In v
alue
In v
olum
e
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 IFRS
3,94
6
583
320
5,68
5
1,72
0
1,01
9
8,52
3
3,25
5
2,03
6
9,37
4
3,49
6
2,00
6
11,3
71
4,88
2
3,26
3
2004
2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS
2004 IFRS 2005 IFRS 2006 IFRS 2006 proforma 2007 IFRS0%
10%
20%
30%
40%
50%
60%
70%
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
60
80
100
120
140
160
180
44
56 58
38
24
30
18
8
15
21
37
5760
43
29
4.05
.200
7
4.06
.200
7
4.07
.200
7
4.08
.200
7
4.09
.200
7
4.10
.200
7In
val
ue
In v
olum
e
In v
alue
In v
olum
e
4.11
.200
7
4.12
.200
7
4.01
.200
8
4.02
.200
8
4.03
.200
8
80%
90%
100%
110%
120%
130%
140%
50.3
49,7
2005
48.5
51.5
2006
50.6
49.4
2007
51.4
48.6
0%
20%
40%
60%
80%
100%
2004
26.2
73.8
2005
24.1
75.9
2006
24.9
75.1
2007
25.9
74.1
0
20
40
60
80
100
2004
23.7
76.3
2005
23.5
76.5
2006
23.4
76.6
2007
23.7
76.3
0%
20%
40%
60%
80%
100%
2004
67.6
32.4
2005
67.2
32.8
2006
67.2
32.8
2007
67.2
32.8
In 2
007,
for t
he fi
rst t
ime,
the
top
10 c
orpo
ratio
ns ra
nkin
gs in
the
com
mer
cial
seg
men
t was
hea
ded
by P
harm
stan
dard
21annual report 2007 | 02 BuSINESS rEPort \\... MArKEt oVErVIEw
Market TrendsSales in the commercial segment of the Russian pharmaceutical
market accounted for 69% of the total market in 2007. We believe that
growth in the commercial segment has been, and will continue to be,
driven by the following trends:
Increased real disposable income per capita. ■ Accord-
ing to the Economist Intelligence Unit, real disposable income
per capita in Russia is expected to grow at a compound annual
growth rate of 13.9% from 2005 to 2010. Generally, an increase
in disposable income raises demand for pharmaceutical
products after a considerable time lag, whereas a fall in dispos-
able income has an immediate negative effect. According to
Pharmexpert, per capita spending on pharmaceutical products
in Russia grew from $27 in 2001 to $80 in 2007.
Broadening availability of generic products and ■
changing of pharmaceutical product consumption.
Both private and governmental entities in Russia are seeking to
find ways to reduce or contain healthcare costs. The broaden-
ing availability of generic products, which are typically priced
lower than original products, has met this increasing demand
for affordable pharmaceutical products. Cheap local drugs at
drug stores will be continuously replaced by competitive high
quality products including branded products.
continued improvement in health awareness. ■ We
expect that continuing improvement in health awareness and
diagnostic capabilities will give rise to greater utilization of pre-
ventive and curative pharmaceutical products, and thus greater
healthcare expenditures.
Aging Population. ■ Along with the rest of Europe, Russia has
an aging population. The percentage of Russians aged 60 or
over will grow from 16.5% in 1990 to 27% in 2050 (according to
the United Nations, Department of Economic and Social Affairs,
Population Division. World Population Prospects: The 2006 Revi-
sion, Highlights. - New York, 2007). We expect that the health
problems associated with an aging population will help drive
demand for curative pharmaceutical products and medical
technologies, and thus lead to greater healthcare expenditures.
mArket OvervIew
02 Business report>>
22
New trends in pharmacotherapy. ■ New trends in pharma-
cotherapy include the discovery of additional therapeutic ef-
fects of existing generic pharmaceutical products and increased
access to new generations of pharmaceutical substances.
Supply ChainWholesale distributors form the central part of the pharma-
ceutical market supply chain. The extensive territory of the country,
the special requirements for a pharmaceutical logistical infrastruc-
ture, including licensing, and the large number of hospitals and retail
outlets to which the products must be delivered, give rise to the need
for wholesalers. Wholesale distributors supply pharmaceutical prod-
ucts to retail chains, stand-alone pharmacies and hospitals, and also
participate in tenders held by the local state and municipal health care
departments to supply products to the FRP.
Consequently, most pharmaceutical sales in Russia are made
through a number of national, regional and local wholesale distributors
who operate as intermediaries between manufacturers and retail and
hospital segments. In 2007, there were approximately 950 pharmaceu-
tical distributors in Russia, with the five largest, namely SIA Internation-
al, Protek, Katren, ROSTA, Alliance Healthcare (former Apteka Holding),
Genesis, Moron and Biotek, accounting for 87% of the market.
The customer base in the Russian pharmaceutical market is
broad, comprising approximately 10,000 hospitals and 22,500 clin-
ics according to the Russian Federal Service of State Statistics. The
commercial segment comprises pharmacy chains and stand-alone
outlets. There are over 65,000 pharmacy outlets in Russia. Whilst the
sector remains largely unconsolidated, the share of large retail chains is
gradually increasing.
Federal Reimbursement Programme (FRP)Since its introduction in 2005, the FRP has become a key
element of Russia’s pharmaceutical market structure. The FRP was
introduced as a plan of reimbursement of pharmaceutical expenses for
certain socio-economic demographic groups. In particular, the plan
applies to disabled people and veterans, and also covers medicine-
related expenses for treatment of chronic illnesses, such as HIV/AIDS,
23annual report 2007 | 02 BuSINESS rEPort \\... MArKEt oVErVIEw
Sinc
e its
intr
oduc
tion
in 2
005,
the
FRP
has
beco
me
a ke
y el
emen
t of R
ussi
a’s p
harm
aceu
tical
mar
ket
stru
ctur
e. T
he F
RP w
as in
trod
uced
as
a pl
an o
f re
imbu
rsem
ent o
f pha
rmac
eutic
al e
xpen
ses
for
cert
ain
soci
o-ec
onom
ic d
emog
raph
ic g
roup
s
tuberculosis and diabetes. Consequently, the FRP plays a significant
role in creating market demand for prescription products.
In 2006, $2.84 billion worth of drugs (at distribution prices)
were supplied to the privileged population categories under this
programme. Out of that value, only $1.29 billion worth of drugs were
covered by the programme budget. A solution to the financial prob-
lem was delayed. Many pharmaceutical manufactures and distributors
cut their drug supplies as the state failed to pay for the reimbursement
prescriptions. As a result, the necessary medication was distributed to
specific population categories with significant delays. This problem was
finally resolved in December 2007 when all debts were covered.
In 2007, $2.0 billion worth of drugs (at “substituted” prices)
were distributed within the FRP framework. International companies
accounted for 92% of sales by value in the FRP in 2007, with Janssen-
Cilag, Roche, Novartis, Sanofi-Aventis and Novo-Nordisk accounting for
the largest proportion. The share of local products has not grown in
the three years of program implementation, however the opportuni-
ties of substituting some costly imported drugs with their analogues
have not been exhausted so far. Going forward Government focused
on including generic domestic products on the FRP list. Recently, the
Russian Government created the Department of Domestic Pharmaceu-
tical Industry within the Ministry of Industry and Energy (MIE).
mArket OvervIew
02 Business report>>
24
W e are the leading domestic pharmaceutical company in
Russia, the third largest pharmaceutical company operating
in Russia overall and the largest pharmaceutical company
operating in Russia in the commercial segment (consumer spending)
of the Russian pharmaceutical market, by sales value. We develop,
manufacture, market and sell generic and, to a lesser extent, original
pharmaceutical products in various formulations, primarily in Russia.
Our product portfolio includes market-leading brands, such as Arbidol®
(antiviral for systemic use), Pentalgin® (analgesics), Terpincod® (cough
and cold), Complivit® (vitamins) and Flucostat® (antifungal). In 2007,
we ranked first, by sales value, in the commercial segment of the Rus-
sian pharmaceutical market, and Arbidol® was the leading brand, by
sales value, in this segment (the second in the total market).
Our pharmaceutical product portfolio includes products that do
not require a medical prescription (“over-the-counter” or “OTC” prod-
ucts), as well as prescription products. In 2007 OTC products accounted
for 85% and prescription products accounted for 15% of our pharma-
ceutical product sales. Our pharmaceutical product portfolio covers
a wide range of therapeutic segments. Sales of products within our five
core therapeutic segments, namely analgesics, cough and cold, vita-
mins, antiviral for systemic use and antifungal (the “Core Therapeutic
Segments”) accounted for 73% of our pharmaceutical product sales in
2007. Our pharmaceutical product portfolio consists of both branded
pharmaceutical products, which may be trademarked and which we
promote through our direct sales force, and non-branded pharma-
BUSIneSS OvervIew
Arbi
dol®
Our p
rodu
ct po
rtfoli
o inc
ludes
mar
ket-l
eadin
g bra
nds
02 Business report >>
25annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
ceutical products, which are older products that have demonstrated
sustainable demand from consumers without the need for contin-
ued active promotion. Branded pharmaceutical products accounted
for 90% of pharmaceutical product portfolio sales in 2007. Sales of
branded pharmaceutical products increased in 2007 vs. 2006 by 40%.
Following the acquisition of Masterlek in August 2006, leading
Masterlek brands experienced strong sales growth under the Pharm-
standard management in 2007: Arbidol® grew by 56%, Flucostat® by
16%, Amixin® by 14% respectively. The total growth of these three
brands in 2007 was RUR 928 million (on a pro-forma basis).
In addition to our pharmaceutical business, we also develop,
manufacture, market and sell medical equipment, such as sterilizing
and distilling machines, and disposable medical products, such as
syringes. Medical equipment and disposables accounted for 14% of
our sale of goods in 2007.
We generated sale of goods and profit of RUR 11,371.3 million
and RUR 3,263.2 million, respectively, in 2007. Our EBITDA (as defined
in “Presentation of Financial and Other Information”) was RUR 4,882
million for the year ended 31 December 2007. We believe that we had
industry leading growth in EBIDTA margin and profitability in 2007.
The key elements of our business operations are as follows:
Sales and marketingOur sales and marketing activities form an integral part of
our strategic focus. We believe we maintain one of the largest sales
forces in Russia among domestic pharmaceutical companies. As of 31
December 2007, our sales force comprised 340 members, all of whom
have either a medical degree or previous work experience in the phar-
maceutical industry. Our trained and incentivized sales force is divided
into two groups that focus on promoting either OTC products or pre-
scription products. Our sales force maintains strong relationships with
key market participants, particularly pharmacists and specialist doctors,
with the aim of developing brand loyalty and awareness. Our corpo-
rate sales and marketing department is based in Moscow and sup-
ports our sales force with brand and sales management and customer
support initiatives. In 2007 we fully implemented an Electronic Territory
BUSIneSS OvervIew
02 Business report>>
26
Management System (“ETMS”) software system to further integrate our
sales and marketing function with our overall business processes.
manufacturingOur production capacity of 1,3 billion packs as at 31 December
2007 is one of the largest among domestic pharmaceutical companies
in Russia and has allowed us to become one of the largest domestic
pharmaceutical companies in Russia by volume of products sold. We
produce a wide variety of product formulations (for example, capsules
and tablets) and packaging, each of which represents a unique stock
keeping unit (“SKU”), which allows us to target different customer
segments with the same well-recognised umbrella brands. Each of our
five modern manufacturing facilities is certified to be compliant with
Russian good manufacturing practice (“GMP”) standards. Through new
capital investments, we have achieved EU GMP certification for solid
(tablets) and liquid (syrups) dosage forms at our manufacturing facility
in Kursk. We review our cost efficiency at each manufacturing facility
on a monthly basis to help to ensure a controlled cost environment,
and aim to leverage our most cost-efficient facilities by concentrating
production at those sites wherever possible.
StrategyOur goal is to further strengthen our position as the leading
domestic pharmaceutical company in Russia by sales and remain in
the ranks of the top 3 pharmaceutical companies operating in Russia
overall. The key elements of our strategy are as follows:
Promote our market-leading brands to drive sales ■
growth and profitability. We intend to strengthen our
market position in Russia by continuing to leverage our strong
brand loyalty and brand awareness through effective sales and
marketing of our market-leading brands. We will continue pro-
moting these brands by introducing line extensions of trusted
and established products, such as our well-known branded
product ranges Pentalgin®, Codelac®, Complivit®, Arbidol® and
Flucostat®. We will also continue to focus on promoting those
brands for which we can charge higher prices.
27annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
Our
goa
l is
to fu
rthe
r str
engt
hen
our p
ositi
on a
s th
e le
adin
g do
mes
tic p
harm
aceu
tical
com
pany
in R
ussi
a by
sa
les
and
rem
ain
in th
e ra
nks
of th
e to
p 3
phar
mac
eutic
al
com
pani
es o
pera
ting
in R
ussi
a ov
eral
l.
launch new pharmaceutical products in a timely ■
manner to capture market share. We intend to main-
tain strong growth and capture market share by leveraging
the brand loyalty and brand awareness of our market-leading
brands to develop and launch new products in our Core
Therapeutic Segments. We will continue to focus on develop-
ing pharmaceutical compounds that have been successful for
major originator pharmaceutical companies and which we
believe we can successfully introduce in the Russian market.
Specifically, we intend to:
focus on the timely identification and development of new
generic OTC products, including the development of line-ex-
tensions of current brands, such as new formulations of current
analgesics and cough and cold products and new specialised
vitamin products;
focus on the timely identification and development of new generic
prescription products that complement our Core Therapeutic Seg-
ments and develop products to penetrate new therapeutic areas;
launch these new pharmaceutical products in a timely manner
to capture significant market share; and
leverage our sales and marketing infrastructure to promote our
new product launches and achieve a leading market position
for each of our new branded products.
Maintain our focus on cost control. ■ Our focus and ability
to control costs is an important element of both our operat-
ing and financial performance. We will continue to evaluate
and react to manufacturing and distribution cost inefficiencies.
We also plan to further rationalise our manufacturing costs to
maximise gross profit margins by managing our product mix
based on the demand for our pharmaceutical products at our
manufacturing facilities.
Expand our sales and marketing capabilities. ■ Our
sales team has more than doubled in the last two years and
we expect our sales force to number about 450 by the end of
2008. We also expect that our sales force will be further specia-
lised by therapeutic area in 2008. We believe an expanded, and
more specialised, sales and marketing team will facilitate our
increased calling efforts on medical practitioners, regional and
BUSIneSS OvervIew
02 Business report>>
28
Com
pliv
it®Ou
r pro
duct
portf
olio i
nclud
es m
arke
t-lea
ding b
rand
snational distributors and other customers, thereby increasing
their awareness of our product portfolio and driving further
sales growth. We also expect to strengthen our ability to man-
age customer relationships and react to the demands of our
customers more rapidly and efficiently by utilising our recently
implemented ETMS software system, which enables real-time
reporting by our sales force.
grow through acquisitions and realise synergies. ■ We
intend to complement our organic growth by continuing to
assess acquisition opportunities, including for specific brands,
trademarks and patents. For example, in 2006, we acquired
Masterlek, which contributed approximately 30 products to
our product portfolio, including market-leading brands, such
as Arbidol® and Flucostat®, which collectively had sales of RUR
2,818 million in 2007. We derived synergy effect by switching
the manufacturing of these products from third-party facili-
ties to our own modern and efficient facilities. We also got the
benefit from promoting and distributing these brands by our
experienced sales force.
29annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
Exploit opportunities from government healthcare ■
expenditure as they arise. Whilst our growth strategy
does not depend on government healthcare expenditure,
we believe we are well positioned to benefit from potential
changes in the administration of the FRP as they arise. In addi-
tion, we expect growth in the market for sterilising machines
due to the launch of the Priority National Health Project
(“PNHP”), which aims, in part, to equip Russian hospitals with
modern equipment, where we believe our products have a
cost-competitive advantage.
ProductsOur products are divided into pharmaceuticals, which primarily
comprise generic products sold either in the OTC market or with a pre-
scription, and medical equipment and disposables. Our pharmaceuti-
cal product portfolio covers a wide range of therapeutic segments, but
focuses on our Core Therapeutic Segments.
The following table shows our sales and percentage of total
sales for these product areas for the periods indicated:
Year ended 31 December 2006 Year ended 31 December 2007
(rur in millions) (rur in millions)
(audited) (audited)
Pharmaceutical products 7,230.0 9,708.0
of which:
OTC products 6,031.5 8,235.2
Branded 5,340.6 7,547.6
Non-branded 690.8 687.6
Prescription products 1,198.5 1,472.8
Branded 899,4 1,207.0
Non-branded 299.2 265.8
Medical equipment and disposables 1,196.4 1,608.7
Other1 96.4 54.6
total sales 8,522.8 11,371.3
1 We also derive revenue from the lease of certain of our warehouses.
BUSIneSS OvervIew
02 Business report>>
30
Pharmaceutical productsWe were the leading domestic pharmaceutical company in
Russia in 2007 and the third largest pharmaceutical company operat-
ing in Russia overall, by sales value. We develop, manufacture, market
and sell more than 200 generic pharmaceutical products in various
formulations, and two original pharmaceutical products, Arbidol® and
Phosphogliv®. Original pharmaceutical products refer to products that
typically result from the research and development of a new drug
chemical entity or molecule.
Our pharmaceutical product portfolio focuses on our five Core
Therapeutic Segments, namely analgesics, cough and cold, vitamins,
antiviral for systemic use and antifungal (the “Core Therapeutic Seg-
ments”), which together accounted for 73% of our pharmaceutical
product sales in 2007.
The following table sets forth certain information concerning
our pharmaceutical products within the ATC 2 therapeutic category for
the periods specified. Products within the following ATC 2 categories
accounted for 85% of our pharmaceutical product sales in 2007. Our
antiviral for systemic use segment generated the highest sales in 2007,
accounting for 24%, of our pharmaceutical product sales.
atC 2 Category Sales for the year ended 31 December 2006 Sales for the year ended 31 December 2007
Value Volume Value Volume
(rur in millions) (packs in millions) (rur in millions) (packs in millions)
J05 – Antivirals for systemic use1 1,035.6 12.045 2,317.2 25.065
R05 – Cough and cold 1,608.2 52.506 1,868.6 47.655
N02 – Analgesics 1,408.1 142.621 1,547.3 144.976
A11 – Vitamins 963.9 44.768 875.0 39.713
J02 – Systemic agents for fungal infections1 220.0 2.003 503.3 4.576
A05 – Cholagogues and hepatic protectors 286.9 20.570 380.4 18.135
N05 – Psycholeptics 269.8 81.286 365.5 71.440
L03 – Immunostimulating agents1 138.7 0.451 256.9 0.703
C01 – Cardiac therapy 188.2 55.479 166.9 54.579
1 Sales only formed part of our consolidated sales from August 2006
31annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
Otc pharmaceutical products
Our OTC business consists of branded and non-branded
pharmaceutical products which do not require a medical prescription.
These products are purchased either in a pharmacy or other retail out-
let selling OTC medications. OTC pharmaceutical products accounted
for 84% of our pharmaceutical product sales in 2007.
The following table sets forth our top 15 OTC pharmaceutical
products for the periods specified.
product atC 2 therapeutic segment Sales for the year ended 31 December 2007
Sales for the year ended 31 December 2006
Value Volume Value Volume
(rur in millions) (packs in millions) (rur in millions) (packs in millions)
Arbidol® 1 Antiviral 2,316 25.1 1,485 17.3
Terpincod® Cough and cold 1,322 18.9 1,163 17.5
Pentalgin® – N Analgesics 833 18.1 796 17.9
Flucostat® 1 Anti-fungal 502 4.6 435 4.2
Pentalgin® – ICN Analgesics 481 10.7 410 9.7
Complivit® (excluding Mama® and Active) Vitamins 441 8.2 545 10.5
Codelac® Cough and cold 412 8.2 375 8.7
Corvalol Psycholeptics 149 39.8 155 39.8
Afobazole® Psycholeptics 39 0.3 121 1.1
Askophen® Analgesics 85 25.7 80 24.9
Ingalipt Throat praparations 85 3.4 49 1.9
Validol Cardiac therapy 79 39.9 69 36.9
Complivit® Active Vitamins 72 1.4 68 1.3
Complivit® “Mama” Vitamins 65 1.2 50 0.9
Activated charcoal Antidiarrhoeals 60 51.1 47 42.5
total 6,941 256.6 5,848 235.1
1 Sales only formed part of our consolidated sales from August 2006
We actively promoted 13 of our OTC brands in 2007, which
together accounted for 65% of our total OTC product sales in 2007. Our
OTC product portfolio includes well-known brands, such as Arbidol®,
Pentalgin®, Terpincod®, Complivit® and Flucostat®. We believe these
products, as a result of strong brand recognition and our active promo-
BUSIneSS OvervIew
02 Business report>>
32
Bios
ulin
®, P
hosp
hogl
iv®,
Ras
tan®
Our p
rodu
ct po
rtfoli
o inc
ludes
rDNA
(gen
e-en
ginee
ring)
phar
mac
eutic
al pr
oduc
tstion, occupy a “top-of-mind” position among pharmacists, specialist
doctors and consumers which, in turn, strengthens the Pharmstandard
brand. Our well-known brands Complivit®, Pentalgin® and Codelac® are
also major umbrella brands under which we seek to regularly introduce
new formulations to widen the customer segments we target.
Prescription pharmaceutical products
Our prescription pharmaceutical business consists of branded
and non-branded pharmaceutical products that are only available for
purchase with a medical prescription and that are sold to patients in
finished form. Prescription pharmaceutical products accounted for
15% of our pharmaceutical product sales in 2007. Our prescription
product sales grew by 23% in 2007. In 2007 we have launched 5 new
33annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
proscription products, four of them were in the list of top-15 prescrip-
tion product drivers.
Our portfolio of prescription products focuses on four core
market segments: nitrites and nitrates, acid pump inhibitors, ACE
inhibitors, hepatic protectors & lipotropics human insulin’s, growth
hormone, macrolides, anti-fungal. Products within these core segments
accounted for 38% of our prescription product sales in 2007.
The following table sets forth our top 15 prescription pharma-
ceutical products for the periods specified.
product atC 4 therapeutic segment Sales for the year ended 31 December 2007
Sales for the year ended 31 December 2006
Value Volume Value Volume
(rur in millions) (packs in millions) (rur in millions) (packs in millions)
Phosphogliv® Hepatic protectors & lipotropics 356 1.1 253 0.7
Amixin ® Antiviral 247 0.6 217 0.5
Biosulin® Drugs, used in diabets 120 0.2 50 0.1
Renipril® (including Renipril® HT) Cardiovascular 68 2.0 55 1.4
Rastan® Hormones 53 0.1
Cocarboksilaza Vitamins 47 2.2 36 1.7
Pikamilon® Nootropics 45 2.5 34 1.8
Lidokain Anaesthetics 38 0.3 17 0.1
Nitrokor® Cardiac therapy 38 3.2 35 3.3
Azitrox® Macrolides and similar types 37 0.3 34 0.2
Piracetam
Psychoanaleptic, excluding anti-obesity products 37 2.3 24 1.8
Termikon® Anti-fungal 37 0.3 35 0.3
Sul’fokamfokain® Respiratory system product 34 1.8 38 2.3
Ciclodol® Anti-Parkinson drugs 29 1.0 1 0.1
Phenazepam® Psycholeptics 24 1.7 4 0.8
total 1,210 19.6 833 15.1
BUSIneSS OvervIew
02 Business report>>
34
Pent
algi
n-N®
, Pen
talg
in P
lus®
Our p
rodu
ct po
rtfoli
o inc
ludes
mar
ket-l
eadin
g bra
nds recent launches and near-term pipeline
of pharmaceutical productsIn 2007 we have introduced 10 new pharmaceutical products
(5 OTC products and 5 prescription products) including biogeneric
insulin and growth hormone, which accounted for 3% of our pharma-
ceutical product sales in 2007. Our biogeneric product of insulin is in-
cluded on the FRP list for 2007, while our biogeneric version of human
growth hormone was first launched in January 2007.
We believe we are the first Russian pharmaceutical company to
develop and implement production of rDNA (gene-engineering) phar-
maceutical products of human insulin and human growth hormone.
35annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
The following table sets forth certain information concerning
our registration applications by therapeutic segment for both prescrip-
tion products and OTC products as of 31 December 2007.
recent product launches АТС Sales value 2007 Market value 2007 Key Market brands
(uSD mln) (uSD mln)
Maxicold®R05A0-Cold Preparations without Anti-Infectives 2 175.6
Coldrex, Fervex, Teraflu
Passifit®N05B5-Herbal Hypnotics/Sedatives 1 68.3 Novo-Passit, Persen
Immunex®
L03A0-lmmunostimulating Agents Excluding Interferons 0.4 107.9
Immunal, Immunorm
Complivit® Ca D3 A12A- calcium products 1.2 45 Calcium D3, Calcium
Complivit® 365A11A- Multivitamins, combinations 0.2 231.8
Vitrum, Complivit, Multi-Tabs
Biosulin®A10C2-Human Insulins and Analogues 4.9 239.5
Humulin, Protaphan, Actrapid
Rastan®H04C0-Growth Hormones 2.2 21
Genotropin, Saizen, Humatrope
Artrozan ®M01A1-Anti-Rheumatics, Non-Steroidal Plain 0.6 241.1
Movalis, Voltaren, Diclofenac
Mexiprim®C01X0- All Other Сardiac Preparations 1.1 93.2 Mexidol
Benfolipen®A11D (tablets) - vitamin B1 and combinations 0.1 15
Milgamma, Neuromultivit
Following our strategic intentions we are going to launch 9 OTC
and 5 prescription products in 2008 including extension for our Com-
plivit and Pentalgin umbrella brands and new rDNA product Neupo-
max (colony-stimulating factors) for the treatment of neutropenia in
oncology patients.
BUSIneSS OvervIew
02 Business report>>
36
Product Approvals and Launches 2008
new product launches in 2008
Date of expected launch
atC atC value, 2007 Key market brands
(uSD mln)
Influnorm® May-08R05A – cold preparations without anti-infectives 175 Coldrex, Fervex, Teraflu
Pentalgin® Plus Mar-08N02B – non-narcotics analgesics and antipyretics 248
Tempalgine, Baralgine, Nurofen, Solpadeine
Complivit® ophtalmo Sep-08
A11A – multivitamins with minerals 232
Vitrum, Multi-Tabs, Supradine
Complivit® Se Sep-08A11A – multivitamins with minerals 232 Vitrum, Multi
Complivit® Fe Sep-08A11A – multivitamins with minerals 232 Vitrum, Multi
Complivit® Mg Sep-08A11A – multivitamins with minerals 232 Vitrum, Multi
Neurocomplit® Mar-08A11D – vitamin B1 and combinations 43
Milgamma, Multi-Tabs B complex, Neuromultivit
Lactazar® Sep-08 A15A – appetite stimulants Lactasa
Neosmectine® Jan-08A07B – intestinal absorbent antidiarrhoeals 45
Smecta, Carbone Activated
Combilipen® Mar-08A11D3 (injections) – vitamin B1 and combinations 34
Milgamma, Multi-Tabs B complex
Octolipen® Nov-08 A05B0 – hepatic protectors 209 Tioctacid, Berlition
Neupomax® Sep-08L03A1 – colony-stimulating factors 13 Neupogen, Granocyte
Formetin® Jun-08 A10B2 – biguanide antidiabetics 21 Glucofazh, Siofor
Bloctran® Apr-08C09C0 – antgiotensine-2 antagonists plain 21 Losap, Diovan, Kozaar
Sales and marketingOur sales force is divided into three groups, one of which fo-
cuses on promoting OTC products to pharmacies and medical profes-
sionals, a second which focuses on promoting prescription products to
general practitioners and specialist doctors and a third which focuses
on promoting our endocrinology products. As of 31 December 2007,
134 members of our sales force were assigned to OTC product promo-
tion and 157 were assigned to prescription product promotion.
37annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
In 2007, we spent RUR 528.8 million, or 70%, of our marketing
budget marketing our OTC products primarily through television, print
and point of sale materials. In January 2007, we launched our first
advertising campaign for Arbidol® and Flucostat®, two products we
acquired from Masterlek.
medical equipment and disposablesWe develop, manufacture, market and sell medical equipment,
including sterilizing and distilling machines, and disposables, such as
syringes, at our Tyumen manufacturing facility. Medical equipment
and disposables accounted for 14% of our sale of goods in 2006 and
the same 14% of our sale of goods in 2007.
The following table sets forth the sales of our principal medical
equipment and disposables products for the periods specified.
product Sales for the year ended 31 December 2006
Sales for the year ended 31 December 2007
Value % of Sales Value % of Sales
(rur in thousands)
(rur in thousands)
Medical equipment 445.1 37.2 1,211.2 75.2
Syringes and disposable systems 661.2 55.3 318.8 19.8
Spare parts 32.8 2.7 28.6 2
Other 57.3 4.8 50.1 3
total 1,196.4 100 1,608.7 100
manufacturing and facilities
Sourcing raw materialsThe majority of the raw materials used to manufacture our
pharmaceutical products are supplied from a variety of external sourc-
es, primarily brokers. As of 31 December 2007, we had more than 500
raw materials, and we obtained approximately 55% of our raw material
requirements from our top-10 suppliers in 2007. We import the major-
ity of our raw materials for our pharmaceutical products since certain
BUSIneSS OvervIew
02 Business report>>
38
types of raw materials are not produced in Russia, fail to meet quality
standards or are produced in insufficient quantities. We import our raw
materials from a number of countries, including China, Hungary and
India. Raw materials for our medical equipment and disposables busi-
ness are supplied by 20 primary furnishers.
FacilitiesThe following table sets forth information relating to our princi-
pal manufacturing facilities for finished pharmaceutical products.
location approximate size
own/lease Formulations Shifts as at and for the year ended 31 December 2007
(sq m) Capacity (packs in thousands) 1
utilisation (%) 2
Leksredstva (Kursk)
14,900 Lease syrups and liquid forms 3 46,456 98
tablets 3 638,705 49
sprays 3 12,288 47
powders 3 2,241 63
capsules 3 18,870 23
Tomskhimpharm (Tomsk)
29,000 Own syrups and liquid forms 3 5,400 44
tablets 3 326,949 33
UfaVita (Ufa)
5,850 Lease ampoules 3 10,346 56
frozen-dried preparation 3 3,360 0
syrups and liquid forms 3 9,053 25
tablets 3 159,711 52
vitamin bars 3 33,660 39
insulin 2 14,400 15
saline infusion 2 0 0
Phitopharm (N. Novgorod)
1,200 Lease ointments 2 13,600 47
powders 1 10,000 0
syrups and liquid forms 2 23,699 72
tablets 2 8,295 97
total 1,337,033
1 Based on one, two or three daily shifts (8 hours each) and 5 working days per week2 Total production divided by capacity
39annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
The following table sets forth information relating to our manu-
facturing facility for medical equipment and disposables in Tyumen,
which encompasses approximately 239,000 square meters.
production Form Capacity 1
as at 31 December 2007
Syringes 552 million
Needles for syringes 1,200 million
Sterilising machines (up to 100 liters) 8,400
Sterilising machines (greater than 100 liters) 318
Distilling machines 6,200
1 Based on one, two or three daily shifts (8 hours each) and 5 working days per week.
distributionWe distribute our pharmaceutical products primarily through
5 wholesale distributors that collectively accounted for 58% of our
pharmaceutical sales in 2007. Our headquarter in Moscow coordinates
our activities to ensure efficient product distribution. Key account
managers are responsible for the performance of particular groups of
distributors and report to a commercial manager.
The following table provides the share of our commercial phar-
maceutical product sales (excluding our exports) in 2007 attributable
to our five largest distributors.
Distributor % of sales
Genesis 19
Katren 14
Protek 10
SIA International 9
Rosta 6
total 58
BUSIneSS OvervIew
02 Business report>>
40
employees As of 31 December 2007, we had 5,456 full-time employees, of
whom 54 % were represented by trade unions. We have not experi-
enced any business interruption as a result of labour disputes and we
consider our relationship with our employees to be good.
The following table shows our headcount as at the years ended
31 December 2006 and 2007.
Staff as at 31 December
2006 2007
Production/Logistics 3,929 3,949
Research and development 102 140
Sales and marketing 347 600
Management and administrative 888 767
Total 5,266 5,456
The following table shows our headcount as at 31 December 2007
at each of our manufacturing facilities and at our headquarters in Moscow.
Staff Kursk ufa tomsk n. novgorod tyumen St. petersburg HQ
Production/Logistics 1,218 1,049 355 98 1,181 48 -
Research and development 41 28 18 4 8 - 41
Sales and marketing 2 - - - - - 598
Management and administrative 91 198 94 30 154 33 167
Total 1,352 1,275 467 132 1,343 81 806
In 2007 we increased the staff at headquarters by 39% from
582 to 806 employees. Most new people were employed to sales and
marketing department to promote our leading brands Arbidol®, Flu-
costat®, Phosphogliv®, Rastan®.
We increased the staff in our manufacturing facilities in Kursk
and Ufa on 13% and 8% respectively because of increase of production
capacities and installment of new production lines. We continue the
concentration of production process and transfer production to more
effective sites. As a results we decrease the staff of N. Novgorod on 57%
in December 2007.
41annual report 2007 | 02 BuSINESS rEPort \\... BuSINESS oVErVIEw
Code
lac®
Our p
rodu
ct po
rtfoli
o inc
ludes
mar
ket-l
eadin
g bra
nds
P roducing and distribution of pharmaceutical products and
medical equipment for domestic and foreign markets are
closely connected with some specific financial and operational
risks. The Company pays considerable attention to risk management
processes, whereas high rate of financial results hardly depends on it.
Coordination of risk management activity in the Company
bases on a complex of internal standards and analytical tools. There is
a special department created for implementation effective audit and
controlling.
rISk mAnAgement
02 Business report >>
42
Aggregative operational and financial risks chart is set in table below:
category specification possible risks control mode probability
Financial risk of inflation Increase in API and other raw material prices;disconnection of raw material and product prices
construction of corporate data system; market monitoring
low
noncompetitive product prices
marketing policy; market monitoring
low
foreign currency risk
Risk in currency of borrowing and accounts payable
forecasting activity; prequalification
medium
liquidity risk Lack of monetary assets for repayment (taxes, labour costs, loan, % etc.)
controlling of movement of funds
high
risk of changes in fair value of derivatives
on demand outsourcing medium
credit risk losses from creation of reserves for overdue accounts receivable
credit policy, checking of mutual exchanges
high
operational staff risk abuse of official position creating and regulation of business procedures
medium
incorrect organization of information flow
inspection of business processes, organization of professional trainings
low
risk of loss of key managers and specialists
proper compensation package
medium
lack of skilled personnel efficiency upgrading of HR department
high
risk of procedures
Incorrect organization of business processes
qualified personnel; system of controlling measures
low
risk of insufficient information security
systematic control of access to data
medium
risk of IT system
processing risk creating and actualization of information reserve storages
low
external risks intense competition risk development of marketing strategy; market monitoring; promotion
low
losses from mergers and acquisitions
preliminary weighted analysis; creating of databases
low
losses from contractual delinquency within participation in Federal Reimbursement Program
accumulation of information; controlling of contractual fidelity; diversification of accounts receivable
low
43annual report 2007 | 02 BuSINESS rEPort \\... rISK MANAgEMENt
44
our sale of goods increased by rur 2,848.5 million, or 33%, from rur 8,522.8 million in 2006 to rur 11,371.3 million in 2007
management’s discussion 03
and Analysis of financial condition and results Of Operations development
45annual report 2007
Fluс
osta
t®Ou
r pro
duct
portf
olio i
nclud
es m
arke
t-lea
ding b
rand
s
T he following discussion of our financial condition and results
of operations should be read in conjunction with our Consoli-
dated Financial Statements and the notes thereto and the other
information included elsewhere in this Report.
On 2 August 2006, the Company acquired all of the share capi-
tal of CJSC “Masterlek” (“Masterlek”) and, as a result, from 2 August 2006
the Company’s Consolidated Financial Statements include the activities
of Masterlek.
This section contains forward-looking statements that involve
risks and uncertanties. Our actual results may differ materially from
those discussed in such forward-looking statements as a result of vari-
ous factors, including those described under “Risk Factors” and “Cau-
tionary Note Regarding Forward-Looking Statements.”
IntrOdUctIOn
03 Management’s Discussion and Analysis >>
46
T he following table sets forth our income statement line items
for the years ended 31 December 2006 and 2007 in absolute
terms and as a percentage of sales (foreign exchange gain
losses included for 2007):
Year ended 31 December 2006 Year ended 31 December 2007
rur in mln % rur in mln %
Sale of goods 8,522.8 100 11,371.3 100
Pharmaceutical products 7,230.0 85 9,708.0 85
OTC products 6,031.5 71 8,235.2 72
Branded 5,340.6 63 7,547.6 66
Non-branded 690.9 8 687.6 6
Prescription products 1,198.5 14 1,472.8 13
Branded 899.3 10 1,207.0 11
Non-branded 299.2 4 265.8 2
Medical equipment and disposables 1,196.4 14 1,608.7 14
Other sales 96.4 1 54.6 1
Cost of sales (3,581.2) 42 (4,519.7) 40
gross profit 4,941.5 58 6,851.6 60
Selling and distribution costs (1,268.2) 15 (1,626.0) 14
General and administrative expenses (498.9) 6 (570.5) 5
Other expenses (207.0) 2 (41.4) 0
Interest income 24.0 0 28.7 0
Interest expense (291.4) 3 (320.4) 3
Profit before income tax 2,700.1 32 4,321.9 38
Income tax expense (664.0) 8 (1,058.7) 9
Profit for the period 2,036.1 24 3,263.2 29
Attributable to participants of the Company 1,897.7 - 3,227.9 -
Attributable to minority interests 138.4 - 35.3 -
reSUltS Of OPerAtIOnS
03 Management’s Discussion and Analysis >>
47annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
Sale of GoodsWe sell our pharmaceutical products almost entirely to whole-
sale distributors and our medical equipment and disposable products
through distributors and directly to hospitals. We have increased sales
over the period under review through selective acquisitions and organ-
ically. We have grown our sales organically by improving sales volumes
of our higher priced brands and by expanding the product ranges
offered within those brands.
Our sale of goods increased by RUR 2,848.5 million, or 33%,
from RUR 8,522.8 million in 2006 to RUR 11,371.3 million in 2007. This
increase was primarily attributable to an increase of RUR 2,511.4 mil-
lion in both prescription branded product sales and OTC branded and
non-branded product sales. We generated the growth in Pharmstan-
dard products primarily through increased sales volumes of our higher
priced products, without growing our overall production volumes.
Pharmaceutical productsOTC product sales increased by RUR 2,203.7 million, or 37%,
from RUR 6,031.5 million in 2006 to RUR 8,235.2 million in 2007. This
increase in OTC sales principally occurred due to our active market-
ing strategy. Our Arbidol® brand generated an increase of RUR 831.0
million, or 56%, in sales in 2007 as compared to 2006. We also increased
sales of Terpincod® by RUR 159.0 million, or 14.0%, in 2007 as compared
to 2006. This principally resulted from increased sales volumes and, to
a much lesser extent, through small pricing increases resulting from
increased sales in the commercial sector. Our sales of Pharmstandard
OTC non-branded products stayed approximately the same at RUR 687
million, or 7%, in 2007.
Prescription product sales increased by RUR 274.3 million, or
23%, from RUR 1,198.5 million in 2006 to RUR 1,472.8 million in 2007.
This increase was primarily attributable to the contribution to sales by
our brands Phosphogliv®, Amixin® and Biosulin®. In particular, sales of
Phosphogliv® for such period increased RUR 103.0 million, or 41%, in
2007 as compared to 2006. To a lesser extent, the increase was attribut-
able to a growth in: Amixin®, which growth in sales came to RUR 29.0
million, or 14%; Biosulin®, which achieved growth of RUR 70.0 million,
or 140%, in 2007 as compared to 2006.
reSUltS Of OPerAtIOnS
03 Management’s Discussion and Analysis>>
48
Medical equipment and disposablesSales in our medical equipment and disposables segment in-
creased by RUR 412.3 million, or 34%, from RUR 1,196.4 million for 2006
to RUR 1,608.7 million for 2007. This increase was primarily attributable
an supply of federal tender of sterilizers .
Cost of SalesOur cost of sales comprises materials and components, pro-
duction overheads, direct labour costs and depreciation. Our costs of
sales increased by RUR 938.5 million, or 26.0%, from RUR 3,581.2 million
in 2006 to RUR 4,519.7 million in 2007., primarily because of the first
full year consolidation of the operations of Masterlek and increase
of depreciation and amortisation. Cost of sales, as a percentage of
sales was 39.7% in 2007 and decreased by 2.3% in comparison to
2006 as a result of a strong growth in sales of our higher priced brand
products and as a result of our benefiting from synergies. We also
experienced an increase in depreciation and amortisation by RUR 221.0
million, or 85.0%, from RUR 260.3 million in 2006 to RUR 481.3 million in
2007 resulting from the depreciation of intangible assets of Arbidol®,
Flucostat®, Amixin®. The largest factor of our cost of sales is materials
and components which, as a percentage of cost of sales, were 65.9%
and 66.3% in the years ended 31 December 2006 and 2007, Materi-
als and components increased by RUR 636.8 million, or 27.0%, from
RUR 2,360.6 million in 2006 to RUR 2,997.5 million in 2007 The research
and development costs associated with our operations have not been
significant to date and are principally included in our production over-
head and direct labour costs.
Gross ProfitAs a result of the foregoing factors, gross profit increased by
RUR 1,910.0 million, or 39.0%, from RUR 4,941.5 million in 2006 to RUR
6,851.6 million in 2007. As a percentage of sales, gross profit increased
from 58.0% in 2006 to 60.3% in 2007.
Operating costs and expensesOur operating costs and expenses increased by RUR 429.5 mil-
lion, or 24.0%, to RUR 2,196.5 million in 2007, compared to RUR 1,767.0
49annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
We
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million in 2006. Our operating costs and expenses were 19.3% of sales
in 2007 compared to 20.7% of sales in 2006.
Our selling and distribution costs increased by RUR 357.9 mil-
lion, or 28%, to RUR 1,626.0 million in 2007, compared to RUR 1,268.2
million in 2006. This increase primarily consisted of marketing and ad-
vertising costs incurred by implementation of marketing strategy. Our
labour costs increased as a result of our recruitment of additional sales
representatives during the period and, to a lesser extent, an increase in
salaries of our sales force.
Our general and administrative expenses increased by RUR 71.6
million, or 14%, to RUR 570.5 million in 2007, compared to RUR 498.9
million in 2006. This increase in general and administrative expenses
primarily resulted from an increase in labour costs by RUR 68.5 million
from RUR 288.0 million in 2006 to RUR 356.5 million in 2006 principally
resulting from an increase in salary and bonuses and an accrual for
holiday leave.
Operating profit (foreign exchange gain losses included for 2007)As a result of the foregoing factors, our operating profit in-
creased by RUR 1,480.5 million, or 47.0%, from RUR 3,174.5 million in
2006 to RUR 4,655.0 million in 2007. Our operating profit was 40.9% of
sales in 2007, compared to 37.2% of sales in 2006.
Other expensesOur other expenses decreased by RUR 165.5 million, or 80%,
from RUR 207.1 million in 2006 to RUR 41.4 million in 2007. Other
expenses in 2007 principally resulted from the loss on disposal of prop-
erty, plant and equipment at our facilities at Tyumen and at St Peters-
burg (as part of our closure of these facilities).
Interest expense, netOur interest expense, net increased by RUR 24.2 million, or
9%, from RUR 267.4 million in 2006 to RUR 291.6 million in 2007. The
increase in interest expense was principally attributable to interest pay-
ments under the Citibank Loan Agreement drawn in December 2006
for the purpose of repaying in full the shareholder loan for Masterlek
acquisition.
reSUltS Of OPerAtIOnS
03 Management’s Discussion and Analysis>>
50
Income Tax ExpenseThe enacted statutory income tax rate for Russia was 24% for
the years ended 31 December 2006 and 2007. We had tax expenses
of RUR 1,058.7 million in 2007, which reflected an effective tax rate of
9.3%, compared to a tax expense of RUR 664.0 million in 2006, which
reflected an effective tax rate of 7.8%. We had additional tax expense in
both periods in excess of the statutory rate as a result of the incurrence
of non-tax deductible expenses.
Minority interestsOur minority interests decreased by RUR 103 million, from RUR
35 million in 2007 compared to RUR 138 million in 2006. In April 2006,
June 2006 and July 2006 we acquired an additional interest in our
subsidiaries in Ufa and Tyumen which resulted in the Company’s inter-
est increasing from 56% to 91% and from 55% to 89% of these share
capital, respectively.
Profit (foreign exchange gain losses included for 2007) As a result of the foregoing factors, profit attributable to our
shareholders increased by RUR 1,227.2 million, or 60%, from RUR
2,036.1 million in 2006 to RUR 3,263.2 million in 2007.
51annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
Focus on improving operating profit margins
We are focused on improving operating profit as a percentage
of sales. Since 2004, we have achieved significant improvements in
our operating profit margin (from 17% in 2004 to 40.9% in 2007) by
increasing the proportion of our more highly priced and profitable
branded products, implementing cost efficiencies and reducing our
sourcing costs.
With the acquisition of Masterlek, and the related shift from
third-party outsourced production services to our own manufactur-
ing facilities for the Masterlek products, we achieved synergy effect
from increase of gross profit margin of Masterlek products (Arbidol®,
Flucostat®).
The table below sets forth the development of our operating
profit for the years ended 31 December 2006 and 2007 in absolute
terms and as a percentage of sales (foreign exchange gain losses
included for 2007):
Year ended 31 December 2006 Year ended 31 December 2007
(rur in mln) % of Sales (rur in mln) % of Sales
Operating Profit 3,174.4 37.2% 4,655.0 40.9%
Expansion of sales forceIn recent years, we have undertaken a significant expansion of
our sales force as part of our ongoing strategic focus on maintaining
strong relationships with key market participants. Our total sales force
has grown from 69 at the end of 2004 to 340 at the end of December
2007. We expect our sales force to number over 450 by the end of
2008. We also seek to ensure that our sales force is incentivised by
offering them the opportunity to earn an additional percentage of
their annual salary by meeting certain quarterly sales targets, which are
reviewed and revised quarterly. We currently offer up to an additional
33% of annual salary paid quarterly which is in accordance the current
market situation. We plan to further incentivise our sales force by im-
plementing new training programs and a performance management
program and continuing to offer competitive compensation packages.
trendS AffectIng OUr reSUltS Of OPerAtIOnS In 2007
03 Management’s Discussion and Analysis >>
52
lIqUIdIty And cAPItAl reSOUrceS
03 Management’s Discussion and Analysis Overview
Our liquidity requirements arise primarily from the need to
fund our working capital, our capital expenditure program and the
development and expansion of our product portfolio through selec-
tive acquisitions. During the periods covered by our Consolidated
Financial Statements, we have primarily financed our operations and
investments through free cash flow and short-term borrowings from
banks and related parties. We intend to fund future acquisitions, if any,
through free cash flow and borrowings.
The following table summarises our cash flows during the years
ended 31 December 2006 and 2007.
Year ended 31 December 2006 Year ended 31 December 2007
(rur in mln)
Net cash from operating activities 1,220.3 2,081.4
Net cash from (used in) investing activities (4,481.3) (1,729.8)
Net cash from (used in) financing activities 3,209.9 352.0
Cash and cash equivalents, end of period 193.0 193.0
Net cash from operating activities Substantially all of our cash flows from operating activities for
the periods covered by our Consolidated Financial Statements were
generated from sales of pharmaceutical products and medical devices.
Our standard commercial contract with distributors includes credit
terms ranging up to 90 days.
Net cash from operating activities was RUR 2,081 million and
RUR 1,220 million in the year ended 31 December 2007 and 2006,
respectively. The increase in net cash flow from primary activities were
generated by reduction in the part of receivables in 2007, due to the
payment of FRP program debts related to sales in 2006, and, further-
more, by growth in balance item VAT recoverable. Additionally the
effect in part of higher priced products, associated with the acquisition
of Masterlek in 2006, gave rise to an economic benefits inflow to the
Company, which resulted in an incremental increase in net cash flow.
>>
53annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
Net cash from investing activitiesNet cash used in investing activities was RUR 4,481 million and RUR
1,730 million in the years ended 31 December 2006 and 2007, respectively. Our
most significant investing activities for the periods consisted of the acquisi-
tion of property, plant and equipment and intangible assets, cash paid for fi-
nancial assets, cash used to buy subsidiaries and cash paid to purchase TZMOI.
With respect to the acquisition of property, plant and equipment,
we paid RUR 805.7 million, RUR 521.6 million in the years ended 31 De-
cember 2006 and 2007, respectively. These acquisitions were primarily
attributable to capital investments in new production capacity at our
manufacturing facility in Kursk, including a new central manufacturing
laboratory and new production lines for tablets, capsules and sprays, at
our manufacturing facility at Ufa, including new production lines for so-
lutions, human growth hormone and tablets, and at our manufacturing
facility in Tomsk, including new production lines for Masterlek’s products.
In 2007, we acquired an intangible assets (trade marks) for
RUR 165.2 million including RUR 160.0 million (in 2006 for RUR 84.3 million).
In 2007, we paid RUR 824.7 million in installments, for the acqui-
sition of TZMOI shares (2006: RUR 707.0 million).
In 2007, we acquired a long-term financial asset represented by
19.88% of the shares of “Dipaka Trading Limited” for RUR 245.4 million.
This company is the sole shareholder of the Russian pharmaceutical
company “Mirpharm”. Moreover, this company owns several medical
patents and trademarks, and a manufacturing facility of API in Belgorod.
Net cash from financing activities Net cash from financing activities was RUR 352.0 million in the
year ended 31 December 2007. This amount consisted of the repay-
ment in an amount of RUR 330.0 million of the current part of the
Citibank Loan received in 2006 and a minor part of another loan.
Contractual obligations and other commitmentsAs of 31 December 2006, we had no material contractual obliga-
tions, other than capital expenditure, certain other liabilities incurred in
the ordinary course of business, such as trade payables, wages and tax
expenses and the remaining amount payable with respect to our acquisi-
tion of TZMOI. We paid RUR 824.8 million in 2007 to the vendors of TZMOI.
We do not engage in any significant off-balance sheet financing.
lIqUIdIty And cAPItAl reSOUrceS
03 Management’s Discussion and Analysis>>
54
W e are exposed to market risks with respect to foreign cur-
rency exchange rates, interest rates, the creditworthiness of
the counterparties with whom we expect payments under
normal commercial conditions and fluctuations in the prices we pay
for our raw materials. We centrally manage and monitor our exposure
to these risks in accordance with our treasury policies by seeking to
minimise external financial risks.
Credit riskOur principal credit risk is the risk that a distributor fails to fulfill
its payment obligations under a sales contract. Under the general
terms on which we transact business, all of our sales are made on
credit terms depending on our credit policy with respect to a particular
customer. We manage our exposure in this respect by having policies
in place to ensure that sales of products are made to customers with
an appropriate credit history. Our credit committee, comprising our
CEO, CFO and Director of Commercial Operations sets a credit policy,
which is revised when particular circumstances require, which gener-
ally divides customers into three categories: those with a maximum
credit limit, those for whom the credit committee will set a credit limit
and those who are required to make prepayments. The majority of
our sales are to customers who fall into the first category 58% of our
sales in 2007 were made to our five largest customers). The carrying
amount of accounts receivable, net of provisions, represents the maxi-
mum amount of exposure to credit risk at the end of each quarter. We
believe we have no significant concentrations of credit risk. Although
collection of receivables could be influenced by economic factors, our
management believes that there is no significant risk of loss beyond
the provision already made.
Currency RiskA proportion of our expenses is in currencies other than the
rouble (the measurement and presentation currency of our Consoli-
dated Financial Statements). We incur currency risk whenever we enter
into transactions denominated in a currency other than our measure-
ment currency. Generally, our foreign currency transactions are settled
in roubles but linked to the US dollar or euro and include a substantial
proportion of our raw material expenses and borrowings (and the
qUAntItAtIve And qUAlItAtIve dISclOSUreS ABOUt mArket rISk
03 Management’s Discussion and Analysis >>
55annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
related interest payments thereon). Therefore, our cost of sales and op-
erating costs and expenses as presented in our Consolidated Financial
Statements, as well as the amount of payables and borrowings shown
in the balance sheet could be impacted by changes in the US dollar-
rouble exchange rate. Our principal method for minimising currency
risks is to maintain a proportion of our transactions denominated in
roubles in order to avoid exposure to currency fluctuations. We do not
expect the level of our exposure to currency risk to change throughout
the remainder of 2008.
Interest rate risk We are exposed to interest rate risk through interest cash flow
and market value fluctuations as the majority of interest rates on our
long-term borrowings are floating and based on LIBOR. In September
2007, when LIBOR rate interest was approximately 5.7%, we entered
into an Interest Rate Swap agreement in respect OF all interest pay-
ments due in respect to the Citibank loan basically swapping the LIBOR
rate interest obligations into a fixed rate of 4.932% per annum. In this
CONNECTION, the Group MITIGATEDTHE RISK OF fluctuations IN LIBOR
rates.
Liquidity riskOur policy is to maintain sufficient cash and cash equivalents
or have available funding through an adequate amount of committed
credit facilities to meet its operating and financial commitments. We
perform continuous monitoring of cash deficit risks and continuous
monitoring of repayment of its financial liabilities on time. Moreover,
we perform daily planning and control cash flow procedures.
Capital Risk ManagementThe Group’s objectives when managing capital are to safeguard
the Group’s ability to continue as a going concern in order to provide
returns for shareholders and to maintain an optimal capital structure to
reduce the cost of capital. The Group manages its capital structure and
adjusts it, in accordance with external market conditions. To maintain
or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, issue
qUAntItAtIve And qUAlItAtIve dISclOSUreS ABOUt mArket rISk
03 Management’s Discussion and Analysis>>
56
new shares or sell assets to reduce debt (while taking into consider-
ation terms and conditions set by the Citibank Loan Agreement).
Commodity price riskWe do not believe we are subject to material risk due to move-
ments in raw material commodity prices for the production of our
products because we do not rely on any one commodity to a signifi-
cant extent and the prices of the raw materials we purchase do not
generally increase or decrease in tandem with each other.
57annual report 2007 | \\... MANAgEMENt’S DIScuSSIoN AND ANAlySIS oF FINANcIAl coNDItIoN AND rESultS oF oPErAtIoNS DEVEloPMENt
58
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 Decem-ber 2007, and its financial performance and its cash flows for the year then ended in accordance with International Financial reporting Standards.
consolidated 04
financial Statements
59annual report 2007
to the Shareholders and Management of oJSc “Pharmstandard”
W e have audited the accompanying consolidated financial
statements of OJSC “Pharmstandard” and its subsidiaries
(“the Group”), which comprise the consolidated balance
sheet as at 31 December 2007, and the consolidated statement of
operations, consolidated statement of changes in equity and consoli-
dated cash flow statement for the year then ended, and a summary of
significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presen-
tation of these consolidated financial statements in accordance with
International Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to
the preparation and fair presentation of consolidated financial state-
ments that are free from material misstatement, whether due to fraud
or error; selecting and applying appropriate accounting policies; and
making accounting estimates that are reasonable in the circumstances.
Auditors’ Responsibility Our responsibility is to express an opinion on these consoli-
dated financial statements based on our audit. We conducted our
audit in accordance with International Standards on Auditing. Those
standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evi-
dence about the amounts and disclosures in the financial statements.
The procedures selected depend on the auditors’ judgment, including
the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assess-
ments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order
to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of
IndePendent AUdItOrS’ rePOrt
04 consolidated financial statement >>
60
accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is suf-
ficient and appropriate to provide a basis for our audit opinion.
OpinionIn our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Group as at
31 December 2007, and its financial performance and its cash flows for
the year then ended in accordance with International Financial Report-
ing Standards.
10 April 2008
61annual report 2007 | \\... coNSolIDAtED FINANcIAl StAtEMENtS
(in thousands of russian roubles)
notes 2007 2006
ASSEtS
Non-current assets
Property, plant and equipment 8 3,691,266 3,788,581
Investment property – 14,522
Intangible assets 9 4,468,477 4,473,639
Long-term financial assets 14 245,398 –
8,405,141 8,276,742
current assets
Inventories 11 1,760,195 1,406,952
Trade receivables 12 4,176,200 3,373,741
VAT recoverable 358,767 222,675
Prepayments 130,479 169,232
Short-term financial assets 14 111,899 104,866
Cash and cash equivalents 13 192,589 192,966
6,730,129 5,470,432
Non-current assets classified as held for sale 10 158,855 22,655
total assets 15,294,125 13,769,829
consolidated Balance Sheetat 31 December 2007
62
(in thousands of russian roubles)
notes 2007 2006
EQuIty AND lIABIlItIES
Equity attributable to equity holders of the parent
Share capital 18 37,793 37,793
Retained earnings 9,004,021 5,838,906
9,041,814 5,876,699
Minority interest 560,879 463,664
total equity 9,602,693 6,340,363
Non-current liabilities
Long-term borrowings and loans 15 1,954,576 3,523,997
Deferred tax liability 25 1,047,799 1,080,828
Derivative financial instruments 15, 27 44,598 –
Other non-current liabilities 36,826 47,767
3,083,799 4,652,592
current liabilities
Trade and other payables and accruals 17 1,046,520 2,092,882
Current portion of long-term borrowings 15 1,310,374 351,415
Income tax payable 37,934 184,118
Other taxes payable 16 212,806 148,459
2,607,633 2,776,874
total liabilities 5,691,432 7,429,466
total equity and liabilities 15,294,125 13,769,829
Signed and authorised for release on behalf of the Board of Directors of OJSC PHARMSTANDARD
General Director I. K. Krylov
Chief Financial Officer E. V. Arkhangelskaya
10 April 2008
The accompanying notes on pages 60-109 are an integral part of these consolidated financial statements.
63annual report 2007 | \\... coNSolIDAtED FINANcIAl StAtEMENtS
(in thousands of russian roubles)
notes 2007 2006
Revenue -sale of goods 19 11,371,345 8,522,780
Cost of sales 20 (4,519,749) (3,581,237)
gross profit 6,851,596 4,941,543
Selling and distribution costs 21 (1,626,041) (1,268,160)
General and administrative expenses 22 (570,519) (498,929)
Other income 23 274,142 –
Other expenses 23 (315,591) (206,996)
Financial income 24 28,729 23,987
Financial expense 24 (320,367) (291,363)
Profit before income tax 4,321,949 2,700,082
Income tax expense 25 (1,058,709) (664,014)
Profit for the year 3,263,240 2,036,068
Attributable to:
Equity holders of the Parent 3,227,895 1,897,671
Minority interests 35,345 138,397
3,263,240 2,036,068
Earnings per share (in Russian roubles) - basic and diluted, for profit of the year attributable
to equity holders of the parent 18 85.41 50.21
Signed and authorised for release on behalf of the Board of Directors of OJSC PHARMSTANDARD
General Director I. K. Krylov
Chief Financial Officer E. V. Arkhangelskaya
10 April 2008
The accompanying notes on pages 60-109 are an integral part of these consolidated financial statements.
consolidated Statement of Operations For the Year Ended 31 December 2007
64
consolidated Statement of cash flows For the Year Ended 31 December 2007
(in thousands of russian roubles)
notes 2007 2006
cash flows from operating activities:
Profit before income tax 4,321,949 2,700,082
Adjustments for:
Depreciation and amortisation 8,9 527,600 284,797
Allowances for impairment of receivables, inventories and financial assets 11,12,23 152,364 43,202
Loss recognised on non-current assets classified as held for sale 23 24,101 –
Impairment charge 8,23 42,403 –
(Gain) loss on disposal of property, plant and equipment and investments property and non-current assets classified as held for sale 23 (15,044) 160,145
Foreign exchange gain 23 (259,098) –
Gain from revaluation of short-term financial assets 24 (10,578) –
Financial income 24 (18,151) (23,987)
Financial expense 24 320,367 291,363
operating cash flows before working capital changes 5,085,913 3,455,602
Increase in trade receivables 12 (892,491) (1,099,267)
Increase in inventories 11 (385,398) (74,735)
(Increase) decrease in VAT recoverable (136,091) 151,436
Decrease in prepayments 38,753 109,937
Decrease in trade payables, other payables and advances received 17 (184,189) (109,509)
Increase (decrease) in taxes payable other than income tax 64,346 (212,060)
cash generated from operations 3,590,843 2,221,404
Income tax paid 25 (1,237,928) (702,129)
Interest paid (282,917) (322,940)
Interest received 11,361 23,987
Net cash from operating activities 2,081,359 1,220,322
65annual report 2007 | \\... coNSolIDAtED FINANcIAl StAtEMENtS
consolidated Statement of cash flows (continued)
For the Year Ended 31 December 2007
(in thousands of russian roubles)
notes 2007 2006
cash flows from investing activities:
Purchase of property, plant and equipment and intangible assets 8,9 (686,802) (889,911)
Cash paid for subsidiaries acquisition 5 – (3,945,860)
Cash in acquired subsidiaries – 76,097
Cash paid for long-term financial assets 14 (246,308) –
Cash paid to settle the obligation for OJSC “TZMOI” shares acquired in 2005 7 (824,723) (707,000)
Cash received from sale of investment property and property, plant and equipment 8 17,574 135,346
Cash received from sale of short-term financial assets 14 32,513 158,670
Cash paid for short-term financial assets 14 (81,300) (34,466)
Cash received from sale of non-current assets classified as held for sale 10 34,133 370,466
Deposits repaid by related bank, net 7 – 71,649
Loans repaid by related parties 7 25,153 283,743
Net cash used in investing activities (1,729,760) (4,481,266)
cash flows from financing activities:
Capital contribution from the Participant of the Company – 802,400
Cash paid for minority interest in OJSC “Pharmstandard Ufavita” – (802,400)
Proceeds from loans and borrowings 15 – 3,875,412
Repayment of loans and borrowings 15 (351,976) (513,530)
Repayment of loans to related parties – (3,994,242)
Proceeds from loans from related parties – 3,924,242
Repayment of finance lease liabilities – (81,955)
Net cash from (used in) financing activities (351,976) 3,209,927
Net decrease in cash and cash equivalents (377) (51,017)
cash and cash equivalents at the beginning of the year 13 192,966 243,983
cash and cash equivalents at the end of the year 13 192,589 192,966
The accompanying notes on pages 60-109 are an integral part of these consolidated financial statements.
66
consolidated Statement of changes in equityFor the Year Ended 31 December 2007
(in thousands of russian roubles)
equity attributable to equity holders of the parent
Share capital retained earnings
net assets attributable to the participant of
the Company
total Minority interests
total equity
Balance at 31 December 2005 – – 2,790,388 2,790,388 1,134,474 3,924,862
Profit for the period – 1,265,114 632,557 1,897,671 138,397 2,036,068
Contribution from the Participant of the Company for acquisition of additional shares in OJSC “Pharmstandard Ufavita” – – 802,400 802,400 – 802,400
Acquisition of additional shares in OJSC “Pharmstandard Ufavita” by minority shareholders – – – – 11,986 11,986
Effect of acquisition of additional shares in OJSC “Pharmstandard Ufavita” by the Company – – 199,291 199,291 (199,291) –
Issuance of shares in connection with legal reorganization 37,793 4,386,843 (4,424,636) – – –
Effect of acquisition of minority interest in OJSC “TZMOI” – 186,949 – 186,949 (621,902) (434,953)
Balance at 31 December 2006 37,793 5,838,906 – 5,876,699 463,664 6,340,363
67annual report 2007 | \\... coNSolIDAtED FINANcIAl StAtEMENtS
equity attributable to equity holders of the parent
Share capital retained earnings total Minority interests total equity
Balance at 31 December 2006 37,793 5,838,906 5,876,699 463,664 6,340,363
Profit for the period – 3,227,895 3,227,895 35,345 3,263,240
Disposal of part of an ownership interests in subsidiaries – (66,476) (66,476) 66,476 –
Effect of acquisition of minority interest – 3,696 3,696 (4,606) (910)
Balance at 31 December 2007 37,793 9,004,021 9,041,814 560,879 9,602,693
The accompanying notes on pages 60-109 are an integral part of these consolidated financial statements.
consolidated Statement of changes in equity (continued)
For the Year Ended 31 December 2007
68
1. Corporate InformationOJSC “Pharmstandard” (“the Company”) and its subsidiaries (“the Group”) principal activities are production
and wholesale distribution of pharmaceutical and medical products. The Company is incorporated in Russian Fed-
eration. Prior to 5 May 2006, the Company was registered as a limited liability company under the name of “Biovit”.
In May 2006, the Company was renamed as “Pharmstandard” and reorganised into an open joint stock company.
Since May 2007, the Company’s shares are publicly traded (Note 18). The Group’s corporate office is in Dolgo-
prudny, Likhachevsky proezd, 5B, Moscow region, Russian Federation and its manufacturing facilities are based in
Kursk, Tomsk, Ufa, Nizhny Novgorod and Tyumen. The Company held shares of voting interests in the following
subsidiaries consolidated within the Group as of 31 December 2007 and 2006, respectively:
entity Country of incorporation activity 2007 % share
2006 % share
“Pharmstandard” LLC (*) Russian Federation Centralprocurement 100 99
“Pharmstandard-Leksredstva” OJSC
Russian Federation Manufacturing of pharmaceutical products 99 99
“Pharmstandard-Tomskhimpharm” OJSC
Russian Federation Manufacturing of pharmaceutical products 91 91
“Pharmstandard-Ufavita” OJSC Russian Federation Manufacturing of pharmaceutical products 94 97
“Pharmstandard-Octyabr” OJSC
Russian Federation Manufacturing of pharmaceutical products 93 93
“Pharmstandard-Phitofarm-NN” LLC
Russian Federation Manufacturing of pharmaceutical products 99 99
“TZMOI” OJSC Russian Federation Manufacturing of medical equipment 89 90
“TMK” LLC** Russian Federation Manufacturing of medical equipment 100 100
“Masterlek” CJSC Russian Federation Manufacturing pharmaceutical products 100 100
“Black Bird Investment Enterprises Corp”
British Virgin Islands Financecompany 100 100
* Before 1 April 2007, this entity performed the functions of managing company and trading house of the Group, which were then transferred to the Company. Since 1 April 2007, Pharmstandard LLC is specialized in procurement activities, primarily representing purchase of API (raw materials) for the Group production entities.
** As of 31 December 2007 this entity is classified as non-current asset held for sale (Note 10).
notes to the consolidated financial Statements (All amounts are in thousands of Russian Roubles, if not otherwise indicated)
69annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
These consolidated financial statements were authorised for issue by the Board of Directors of the OJSC
“Pharmstandard” on 10 April 2008.
2. Basis of Preparation of the Financial Statements
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”).
Basis of accounting
The Group’s Russian entities maintain their accounting records in Russian Roubles (“RR”) and prepare their
statutory financial statements in accordance with the Regulations on Accounting and Reporting of the Russian
Federation. The statutory financial statements have been adjusted to present these consolidated financial state-
ments in accordance with IFRS. These adjustments principally relate to valuation and depreciation of property,
plant and equipment, valuation and amortisation of intangible assets, certain valuation reserves, using fair values
for certain assets and derivative instruments, purchase accounting for business combinations and the resulting
income tax effects and also to consolidation.
The consolidated financial statements have been prepared under the historical cost convention except
as disclosed in the accounting policies below. For example, derivative instruments and certain short-term assets
are recorded at fair value and non-current assets classified as held for sale are recorded at the lower of carrying
amount and fair value less costs to sell.
changes in accounting policies
The accounting policies adopted are consistent with those of the previous financial period except that the
Group has adopted those new/revised standards mandatory for financial years beginning on or after 1 January 2007.
The changes in accounting policies result from adoption of the following new or amended standards and
interpretations:
IFRS 7 “Financial Instruments: Disclosures”; ■
IAS 1 (amended 2005) “Presentation of Financial Statements – Capital Disclosures”; ■
IFRIC 8 “Scope of IFRS 2”; ■
IFRIC 9 “Reassessment of Embedded Derivatives”; ■
IFRIC 10 “Interim Financial Reporting and Impairment”. ■
70
IFRS 7 “Financial Instruments: Disclosures” requires disclosures that enable users to the financial statements
to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising from
those financial instruments. The new disclosures are included in these consolidated financial statements. While
there has been no effect on the financial position or results, comparative information has been revised where
needed.
The amendment of IAS 1 “Presentation of Financial Statements – Capital Disclosures” requires disclosures
regarding an entity’s objectives, policies and processes for managing capital. These new disclosures are shown in
Note 27.
IFRIC 8 clarifies that IFRS 2 applies to arrangements where an entity makes share-based payments for
apparently nil or inadequate consideration. If the identifiable consideration given appears to be less than the fair
value of the equity instrument granted, under IFRIC 8 this situation typically indicates that other consideration has
been or will be received. IFRS 2 therefore applies.
IFRIC 9 clarifies, that an entity shall assess whether an embedded derivative is required to be separated
from the host contract and accounted for as a derivative when the entity first becomes a party to the contract.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly
modifies the cash flows that otherwise would be required under the contract, in which case reassessment is
required.
IFRIC 10 “Interim Financial Reporting and Impairment” requires that an entity must not reverse an impair-
ment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity
instrument or a financial asset carried at cost. As the Group had no impairment losses previously reversed, this
interpretation had no impact on the financial position of the Group.
There were no significant effects of these changes in policies on these consolidated financial statements.
However, the adoption of IFRS 7 will significantly affect the disclosures relating to financial instruments as pre-
sented in the Note 27 of these consolidated financial statements.
IfrSs and IfrIc Interpretations not yet effective
The Group has not applied the following IFRSs and IFRIC Interpretations that have been issued but are not
yet effective:
IFRIC 11 “IFRS 2 - Group and Treasury Share Transactions”; ■
IFRIC 12 “Service Concession Arrangements”; ■
IFRIC 13 “Customer Loyalty Programmes”; ■
IFRIC 14 “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”; ■
IFRS 8 “Operating segments”; ■
IAS 23 (amended 2007) “Borrowing costs”. ■
IFRS 2 “Share-based Payments” – Vesting Conditions and Cancellations; ■
IFRS 3R “Business Combinations” and IAS 27R “Consolidated and Separate Financial Statements”; ■
IAS 1 Revised “Presentation of Financial Statements”; ■
Amendments to IAS 32 and IAS 1 “Puttable Financial Instruments” ■
71annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
IFRIC 11 addresses the issues whether the certain transactions should be accounted for as equity-settled
or as cash-settled under the requirements of IFRS 2, and concerns the accounting treatment for share-based pay-
ment arrangements that involve two or more entities within the same group. An entity shall apply this interpreta-
tion for annual periods beginning on or after 1 March 2007.
IFRIC 12 addresses the accounting issues relating to the service concession arrangements. An entity shall
apply this Interpretation for annual periods beginning on or after 1 January 2008.
IFRIC 13 “Customer Loyalty Programmes” was issued in June 2007 and becomes effective for financial years
beginning on or after 1 July 2008. This Interpretation requires customer loyalty credits to be accounted for as
a separate component of the sales transaction in which they are granted.
IFRIC 14 “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” was
issued in July 2007 and becomes effective for financial years beginning on or after 1 January 2008. This Interpreta-
tion provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can
be recognised as an asset under IAS 19 “Employee benefits”.
IFRS 8 “Operating segments” was issued in November 2006 and becomes effective for financial years begin-
ning on or after 1 January 2009. IFRS 8 requires disclosure of information about the Group’s operating segments
and replaced the requirements of disclosures of IAS 14 “Segment reporting”. Entities that do not early adopt
IFRS 8 will continue to apply IAS 14 “Segment reporting”.
IAS 23 (amended 2007) “Borrowing costs” is effective for financial years beginning on or after 1 January
2009 and requires capitalization of borrowing costs that relate to a qualifying asset.
IFRS 2 “Share-based Payments” – Vesting Conditions and Cancellations.
This amendment to IFRS 2 Share-based payments was published in January 2008 and becomes effective for
financial years beginning on or after 1 January 2009. The Standard restricts the definition of “vesting condition” to a
condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vest-
ing conditions, which have to be taken into account to determine the fair value of the equity instruments granted.
In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the
control of either the entity or the counterparty, this must be accounted for as a cancellation.
IfrS 3r Business combinations and IAS 27r consolidated and Separate financial Statements
The revised standards were issued in January 2008 and become effective for financial years beginning on
or after 1 July 2009. IFRS 3R introduces a number of changes in the accounting for business combinations that
will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and
future reported results. IAS 27R requires that a change in the ownership interest of a subsidiary is accounted for as
an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give raise to a gain or
72
loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as
the loss of control of a subsidiary. The changes introduced by IFRS 3R and IAS 27R must be applied prospectively
and will affect future acquisitions and transactions with minority interests.
IAS 1 revised Presentation of financial Statements
The revised IAS 1 Presentation of Financial Statements was issued in September 2007 and becomes ef-
fective for financial years beginning on or after 1 January 2009. The Standard separates owner and non-owner
changes in equity. The statement of changes in equity will include only details of transactions with owners, with
all non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of
comprehensive income: it presents all items of income and expense recognised in profit or loss, together with all
other items of recognised income and expense, either in one single statement, or in two linked statements. The
Group is still evaluating whether it will have one or two statements.
Amendments to IAS 32 and IAS 1 Puttable financial Instruments
Amendments to IAS 32 and IAS 1 were issued in February 2008 and become effective for annual periods
beginning on or after 1 January 2009. The amendment to IAS 32 requires certain puttable financial instruments
and obligations arising on liquidation to be classified as equity if certain criteria are met. The amendment to
IAS 1 requires disclosure of certain information relating to puttable instruments classified as equity.
The Group expects that the adoption of the pronouncements listed above will have no significant impact
on the Group’s result of operations and financial position in the period of initial application.
3. Summary of Significant Accounting Policies
3.1 Principles of consolidation
Subsidiaries
Subsidiaries, which are those entities in which the Group has an interest of more than 50 percent of the
voting rights, or otherwise has power to exercise control over their operations, are consolidated. Subsidiaries are
consolidated from the date on which control is transferred to the Group and are no longer consolidated from the
date that control ceases. All intercompany transactions, balances and unrealised gains on transactions between
Group companies are eliminated; unrealised losses are also eliminated unless the transaction provides evidence of
an impairment of the asset transferred. Where necessary, accounting policies for subsidiaries have been changed
to ensure consistency with the policies adopted by the Group.
Minority interest is the interest in subsidiaries with equity not held by the Group. Minority interest at the
balance sheet date represents the minority shareholders’ portion of the fair value of the identifiable assets and li-
abilities of the subsidiary at the acquisition date and the minorities’ portion of movements in equity since the date
of the combination. Minority interest is presented as an equity item.
73annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Business combinations
The purchase method of accounting is used to account for business combinations by the Group. Identifi-
able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.
The excess of purchase consideration over the fair value of the Group’s share of identifiable net assets is
recorded as goodwill (Note 3.8). If the cost of the acquisition is less than the fair value of the Group’s share of iden-
tifiable net assets of the subsidiary acquired the difference is recognised directly in the statement of operations.
Losses allocated to minority interest do not exceed the minority interest in the equity of the subsidiary un-
less there is a binding obligation of the minority to fund the losses. All such losses are allocated to the Group.
Increases in ownership interests in subsidiaries
The differences between the carrying values of net assets attributable to interests in subsidiaries
acquired and the consideration given for such increases are charged or credited to retained earnings
Acquisition of subsidiaries from parties under common control
Purchases of subsidiaries from parties under common control are accounted for using the pooling of inter-
est method. The assets and liabilities of the subsidiary transferred under common control are recorded in these
consolidated financial statements at the carrying amounts of the transferred entity (the Predecessor) at the date
of the transfer. Related goodwill inherent in the Predecessor’s original acquisition is also recorded in these consoli-
dated financial statements. Any difference between the total book value of net assets, including the Predecessor’s
goodwill, and the consideration paid is accounted for in these consolidated financial statements as an adjustment
to equity.
These consolidated financial statements, including corresponding figures, are presented as if the subsidiary
had been acquired by the Group on the date it was originally acquired by the Predecessor.
3.2 cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term de-
posits with an original maturity of three months or less.
3.3 trade receivables
Trade receivables, which generally have a short term, are carried at original invoice amount less an allow-
ance for any uncollectible amounts. Allowance is made when there is objective evidence that the Group will not
be able to collect the debts. Impaired debts are derecognised when they are assessed as uncollectible.
74
3.4 value Added tax
The Russian tax legislation permits settlement of value added tax (“VAT”) on a net basis.
VAT is payable upon invoicing and delivery of goods, performing work or rendering services, as well as
upon collection of prepayments from customers. VAT on purchases, even if they have not been settled at the bal-
ance sheet date, is deducted from the amount of VAT payable.
Where provision has been made for impairment of receivables, impairment loss is recorded for the gross
amount of the debtor, including VAT.
3.5 Inventories
Inventories are recorded at the lower of cost and net realisable value. Cost is determined on a first in, first
out basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs
and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realis-
able value is the estimated selling price in the ordinary course of business, less estimated costs of completion and
the estimated costs necessary to make the sale.
3.6 non-current Assets Held for Sale
An item is classified as held for sale if its carrying amount will be recovered principally through a sale trans-
action rather than through continuing use. Non-current assets held for sale are measured at the lower of carrying
amount and fair value less costs to sell.
3.7 Property, Plant and equipment
Property, plant and equipment are stated at cost or deemed cost at the date of transition to IFRS (herein
referred to as cost) less accumulated depreciation and impairment losses. Deemed cost was determined for prop-
erty, plant and equipment at 1 January 2004 by reference to their fair value through valuation by an independent
appraisal company. Depreciation is calculated on a straight-line basis. The depreciation periods, which represent
the estimated useful economic lives of the respective assets, are as follows:
number of years
Buildings 10 to 50
Plant and machinery 5 to 30
Equipment and motor vehicles 3 to 7
The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each
financial year end. Land is not depreciated.
Repair and maintenance expenditure is expensed as incurred. Major renewals and improvements are capi-
talised, and the assets replaced are derecognised. Gains and losses arising from the retirement of property, plant
and equipment are included in the statement of operations as incurred.
75annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
3.8 goodwill
Goodwill on an acquisition of a subsidiary is included in intangible assets. Following initial recognition,
goodwill is measured at cost less any accumulated impairment losses.
Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances
indicate that the carrying amount may be impaired. For the purpose of impairment testing, goodwill acquired in
a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or
groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group
of units to which the goodwill is so allocated represents the lowest level within the Group at which the goodwill is
monitored for internal management purposes.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of
cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating
unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. Where
goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within
that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount
of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this
circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-
generating unit retained.
3.9 Other Intangible Assets
Intangible assets acquired separately from business combinations are measured on initial recognition at
cost. The cost of intangible assets acquired in a business combination are initially recognised at fair value as at the
date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amorti-
sation and any accumulated impairment losses. Intangible assets with a finite life are amortised on a straight-line
basis over the useful economic lives (for trade marks useful economic life is estimated between 15 and 20 years)
and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amor-
tisation periods and methods for intangible assets are reviewed at least at each financial year-end. Changes in
the expected useful life or the expected pattern of consumption of future economic benefits embodied in the
asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in
accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income
statement in the expense category consistent with the function of the intangible asset.
76
3.10 Investments and Other financial Assets
Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or
loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. The
Group does not have held-to-maturity investments.
When financial assets are recognised initially, they are measured at fair value, plus, in the case of invest-
ments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the
classification of its financial assets on initial recognition and, where allowed and appropriate, re-evaluates this
designation at each financial year end. All regular way purchases and sales of financial assets are recognised on
the trade date, which is the date that the Group commits to purchase the asset. Regular way purchases or sales
are purchases or sales of financial assets that require delivery of assets within the period generally established by
regulation or convention in the market place.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss includes financial assets held for trading and financial
assets designated upon initial recognition as at fair value through profit or loss.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near
term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments
or a financial guarantee contract. Gains or losses on investments held for trading are recognised in profit or loss.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. After initial measurement loans and receivables are carried at amortised cost using
the effective interest method less any allowance for impairment. Gains and losses are recognised in profit or loss
when the loans and receivables are derecognised or impaired, as well as through the amortisation process.
Available-for-sale financial investments
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-
for-sale or are not classified in any of the three preceding categories. After initial measurement, available-for-sale
financial assets are measured at fair value with unrealised gains or losses recognised directly in equity until the
investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously
recorded in equity is recognised in profit or loss.
Fair value
The fair value of investments that are actively traded in organised financial markets is determined by refer-
ence to quoted market bid prices at the close of business on the balance sheet date. For investments where there
is no active market, fair value is determined using valuation techniques. Such techniques include using recent
arm’s length market transactions; reference to the current market value of another instrument which is substan-
tially the same; discounted cash flow analysis or other valuation models.
77annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Amortised cost
Loans and receivables are measured at amortised cost. This is computed using the effective interest meth-
od less any allowance for impairment. The calculation takes into account any premium or discount on acquisition
and includes transaction costs and fees that are an integral part of the effective interest rate.
The Group assesses at each balance sheet date whether a financial asset or group of financial assets is
impaired.
Assets carried at amortised cost
If there is objective evidence that an impairment loss on assets carried at amortised cost has been in-
curred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present
value of estimated future cash flows (excluding future expected credit losses that have not been incurred) dis-
counted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial rec-
ognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the
loss shall be recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases
and the decrease can be related objectively to an event occurring after the impairment was recognised, the previ-
ously recognised impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its
amortised cost at the reversal date. Any subsequent reversal of an impairment loss is recognised in profit or loss.
For more information in relation to trade receivables see Note 3.3.
Available-for-sale financial investments
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any
principal payment and amortisation) and its current fair value, less any impairment loss previously recognised
in profit or loss, is transferred from equity to profit or loss. Reversals in respect of equity instruments classified
as available-for-sale are not recognised in profit or loss. Reversals of impairment losses on debt instruments are
reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event
occurring after the impairment loss was recognised in profit or loss.
3.11 Borrowings
Borrowings are initially recognised at the fair value of the consideration received less directly attributable
transaction costs. After initial recognition, borrowings are measured at amortised cost using the effective interest
method; any difference between the fair value of the consideration received (net of transaction costs) and the
unwinding of discount is recognised as an interest expense over the period of the borrowings.
Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised,
during the period of time that is required to complete and prepare the asset for its intended use. All other borrow-
ing costs are expensed.
78
3.12 Income taxes
Income tax expense comprises current and deferred tax. Current tax is the expected tax payable on the
taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any ad-
justment to tax payable in respect of previous years.
Deferred income taxes are provided for all temporary differences arising between the tax bases of assets
and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax
arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combi-
nation and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are mea-
sured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based
on tax rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities can be offset only if: (a) a Group entity has a legally en-
forceable right to set off current tax assets against current tax liabilities; and (b) the deferred tax assets and the
deferred tax liabilities relate to income taxes levied by the same taxation authority on either: (i) the same taxable
entity; or (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis,
or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts
of deferred tax liabilities or assets are expected to be settled or recovered.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates
and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is
probable that the temporary difference will not reverse in the foreseeable future.
3.13 leases
The determination of whether an arrangement is, or contains a lease is based on the substance of the ar-
rangement at inception date of whether the fulfillment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset.
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership
of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower,
at the present value of the minimum lease payments. Lease payments are apportioned between the finance
charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of
the liability. Finance charges are reflected in the statement of operations.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the
lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
Operating lease payments are recognised as an expense in the statement of operations on a straight line
basis over the lease term.
79annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
3.14 derecognition of financial Assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets)
is derecognised when the rights to receive cash flows from the asset have expired.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expires. Where an existing financial liability is replaced by another from the same lender on substantially different
terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated
as a derecognition of the original liability and the recognition of a new liability, and the difference in the respec-
tive carrying amounts is recognised in the income statement.
3.15 Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past
events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate
of the amount can be made.
Expense relating to any provision is presented in statement of operations. If the effect of the time value
of money is material, provisions are discounted using a current pre-tax rate that reflects where appropriate the
risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is
recognised as a finance cost.
3.16 equity
Share capital
Ordinary shares are classified as equity.
Dividends
Dividends declared by Group subsidiaries are recognised as a liability and deducted from equity at the bal-
ance sheet date only if they are declared before or on the balance sheet date. Such dividends are disclosed when
they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before
the consolidated financial statements are authorised for issue.
3.17 revenue recognition
Revenues are recognised when the title passes to the customer, assuming that collection is reasonably
assured and sales price to final customers is fixed or determinable. Revenues are measured at the fair value of the
consideration received or receivable.
80
3.18 employee Benefits
Under provision of the Russian legislation, social contributions are made through a unified social tax
(“UST”) calculated by the Group by the application of a regressive rate (from 26% to 2%) to the annual gross
remuneration of each employee. The Group allocates the UST to three social funds (state pension fund, social and
medical insurance funds), where the rate of contributions to the pension fund varies from 20% to 2% depending
on the annual gross salary of each employee. The Group’s contributions relating to UST are expensed in the year
to which they relate. Total contributions for UST amounted to RR 244,179 during the year ended 31 December
2007 (2006: RR 203,187) and they were classified as labour costs in these consolidated financial statements.
3.19 foreign currency transactions
The consolidated financial statements are presented in the national currency of the Russian Federation,
Russian Rouble (RR), which is the functional currency of the Company and its Russian subsidiaries. Transactions
in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional
currency rate of exchange ruling at the balance sheet date. All resulting differences are taken to the consolidated
statement of operations. Non-monetary items that are measured in terms of historical cost in a foreign currency
are translated using the exchange rates as at the dates of the initial transactions.
3.19 foreign currency transactions (continued)
The functional currency of the foreign operations is the United States Dollar (US$). As at the reporting date,
the assets and liabilities of that subsidiary are translated into the presentation currency of the Group (the Russian
Rouble) at the rate of exchange ruling at the balance sheet date and its statement of operations is translated at
the weighted average exchange rate for the year. The exchange differences arising on the translation are taken
directly to a separate component of equity. In 2007 and 2006, the foreign subsidiary did not perform any opera-
tions and held minor assets and liabilities, therefore its translation into the presentation currency had no effect on
these consolidated financial statements.
3.20 Impairment of non-financial Assets
The Group assesses at each reporting date whether there is any indication that an asset may be im-
paired. The assets subject to such assessment are primarily property, plant and equipment and trade marks. If
any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is
determined for an individual asset, unless the asset does not generate cash inflows that are largely independent
of those from other assets or group of assets. Where the carrying amount of an asset exceeds its recoverable
amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use,
the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessment of the time value of money and the risks specific to the assets.
81annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
4. Significant Accounting Judgements and Estimates
4.1 Judgements
In the process of applying the Group’s accounting policies, management has made the following judge-
ments, apart from those involving estimates, which have the most significant effect on the amounts recognised in
the consolidated financial statements:
Lease agreements
A lease is classified as finance lease if it transfers substantially all the risks and rewards incidental to owner-
ship, otherwise it is classified as operating lease. Whether a lease is a finance lease or an operating lease depends
on the substance of the transaction rather than the form of the contract. If the lease term is for longer than 75 per-
cent of the economic life of the asset, or that at the inception of the lease the present value of the minimum lease
payments amount to at least 90 percent of the fair value of the leased asset, the lease is classified by the Group as
finance lease, unless it is clearly demonstrated otherwise.
The Group has entered into several lease agreements with the state municipal bodies for land on which
the Group’s factories and buildings, comprising the Group’s principal manufacturing facilities, are located. The
lease agreements specify lease terms between 10 and 50 years with an option to prolong the lease term for
another 10 years. In addition, the lease agreements include a purchase option after termination of the lease.
Purchase price will be determined based on fair value of the land as determined by the municipal authorities. The
Group has classified these lease agreements as operating leases. More details are provided in Note 8.
4.2 estimation Uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance
sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and li-
abilities within the next financial year are discussed below:
Useful life of property, plant and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each
financial year-end. If expectations differ from previous estimates, the changes are accounted for as a change in an
accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.
These estimates may have a material impact on the amount of the carrying values of property, plant and equip-
ment and on depreciation recognised in the statement of operations.
Impairment of non-financial assets
The determination of impairments involves the use of estimates that include, but are not limited to, the
cause, timing and amount of the impairment. The determination of the recoverable amount of a cash-generating
82
unit involves the use of estimates by management. Methods used to determine the value in use include discount-
ed cash flow-based methods, which require the Group to make an estimate of the expected future cash flows
from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value
of those cash flows. These estimates, including the methodologies used, may have a material impact on the fair
value and ultimately the amount of any asset impairment.
The following factors are considered in assessing impairment of major specific assets of the Group:
Property, plant and equipment: ■ changes in current competitive conditions, expectations of growth in the in-
dustry, increased cost of capital, changes in the future availability of financing, technological obsolescence,
discontinuance of service, current replacement costs and other changes in circumstances that indicate
impairment exists.
Trade marks: ■ changes in current competitive conditions, changes in the regulations, expectations of growth
in the industry, increased cost of capital, changes in the future availability of financing, introduction of
alternative products on the market and other changes in circumstances that indicate impairment exists.
Fair values of assets and liabilities acquired in business combinations
The Group is required to recognize separately, at the acquisition date, the identifiable assets, liabilities and
contingent liabilities acquired or assumed in the business combination at their fair values, which involves esti-
mates. Such estimates are based on valuation techniques, which require considerable judgment in forecasting
future cash flows and developing other assumptions.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estima-
tion of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use
requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also
to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount
of goodwill at 31 December 2007 and 2006 was RR 1,180,469. More details are provided in Note 9.
Allowance for doubtful accounts
The Group maintains an allowance for doubtful accounts to account for estimated losses resulting from
the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubt-
ful accounts, management bases its estimates on the aging of accounts receivable balances and historical write-
off experience, customer credit worthiness and changes in customer payment terms. If the financial condition of
customers were to deteriorate, actual write-offs might be higher than expected. As of 31 December 2007, allow-
ances for doubtful accounts have been created in the amount of RR 167,933 (2006: RR 79,308).
Inventory provision
The Group determines the provisions for obsolete or slow moving items of inventories based on their ex-
pected future use and realizable value. The net realizable value is the estimated selling price in the ordinary course
of business less the estimated costs of sale or distribution. Selling prices and costs to sale are subject to change as
new information becomes available. Revisions to the estimates may significantly affect future operating results.
83annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Current taxes
Russian tax, currency and customs legislation is subject to varying interpretations and changes occur
frequently. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity
of the Group’s entities may not coincide with that of management. As a result, tax authorities may challenge trans-
actions and the Group’s entities may be assessed additional taxes, penalties and interest, which can be significant.
The periods remain open to review by the tax and customs authorities with respect to tax liabilities for three
calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As of
31 December 2007 management believes that its interpretation of the relevant legislation is appropriate and that
it is probable that the Group’s tax, currency and customs positions will be sustained. More details are provided in
Note 26.
84
5. Business CombinationsThe Group acquired 100% interest in CJSC “Masterlek” (“Masterlek”) which is involved in the marketing
and sale of pharmaceutical products and a related immaterial company on 1 August and 22 September 2006,
respectively.
The aggregated effect of these acquisitions is presented in the following table:
Fair value recognised on acquisition
IFrS carrying value immediately before the
acquisition
Property, plant and equipment 4,851 4,851
Intangible assets (Note 9) 3,278,151 4,232
Cash and cash equivalents 76,097 76,097
Trade and other receivables 443,810 443,810
Inventories 307,080 307,080
Other current assets 29,187 24,955
4,139,176 861,025
Trade and other payables 367,589 367,589
Deferred tax liability (Note 25) 787,342 586
1,154,931 368,175
Fair value of net assets 2,984,245 492,850
goodwill arising on acquisition (Note 9) 961,615
consideration paid 3,945,860
Goodwill related to the acquisition of Masterlek represents the fair value of the expected synergies and
other benefits from combining the Masterlek’s trade marks with production assets of the Group.
From the date of the acquisition to 31 December 2006, CJSC “Masterlek” contributed RR 264,883 (adjusted
for the interest expense relating to cost of financing the acquisition) to the net profit of the Group. If the acquisi-
tion had taken place at the beginning of the year, the profit of the Group in 2006 would have been RR 2,006,339
(i.e. aggregate profit of the Group and Masterlek as adjusted for the additional interest expense relating to cost of
financing the acquisition) and revenue of the Group in 2006 would have been RR 9,374,153.
6. Segment InformationThe Group is organised into two main business segments: (1) production and wholesale of pharmaceutical
products and (2) production and wholesale of medical equipment. The second segment arose as a result of the
acquisition of OJSC TZMOI in 2005 and is entirely represented by OJSC “TZMOI”.
Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receiv-
ables and operating cash. There were no assets unallocated to segments as of 31 December 2007 and 2006. Seg-
85annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
ment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate liabilities.
Segment result is segment revenue less segment expenses. Segment expenses consist of cost of sales, selling
and distribution costs, general and administrative expenses and other income and expenses that can be directly
attributed to the segment on a reasonable basis. Capital expenditure comprises additions to property, plant and
equipment. Impairment loss and provisions relate only to those charges made against allocated assets.
The following table presents revenue and profit and certain asset and liability information regarding the
Group’s business segments:
Year ended 31 December 2007
production and wholesale of
pharmaceutical products
production and wholesale of medical
equipment
eliminations Group
Sales to external customers 9,762,637 1,608,708 – 11,371,345
total revenue 9,762,637 1,608,708 – 11,371,345
Gross profit 6,127,524 724,072 – 6,851,596
Segment result 4,163,254 450,333 – 4,613,587
Financial expense, net (291,638)
Profit before income tax 4,321,949
Income tax expense (1,058,709)
Net profit 3,263,240
Segment assets 13,711,609 1,582,516 – 15,294,125
total assets 13,711,609 1,582,516 – 15,294,125
Segment liabilities 1,208,628 96,362 – 1,304,990
Unallocated liabilities 4,386,442
total liabilities 5,691,432
Capital expenditure (Note 8) 446,758 37,375 – 484,133
Intangible assets acquisition (Note 9) 165,220 – – 165,220
Non-current financial asset acquisition (Note 14) 245,398 – – 245,398
Depreciation and amortisation 466,755 60,845 – 527,600
86
Year ended 31 December 2006
production and wholesale of
pharmaceutical products
production and wholesale of medical
equipment
eliminations Group
Sales to external customers 7,326,380 1,196,400 – 8,522,780
Inter-segment sales – 15,867 (15,867) –
total revenue 7,326,380 1,212,267 (15,867) 8,522,780
Gross profit 4,551,045 396,091 (5,593) 4,941,543
Segment result 2,817,508 155,543 (5,593) 2,967,458
Financial expense, net (267,376)
Profit beforeincome tax 2,700,082
Income tax expense (664,014)
Net profit 2,036,068
Segment assets 12,106,791 1,663,038 – 13,769,829
total assets 12,106,791 1,663,038 – 13,769,829
Segment liabilities 1,380,061 115,395 – 1,495,456
Unallocated liabilities 5,934,010
total liabilities 7,429,466
Capital expenditure (Note 8) 882,139 58,455 – 940,594
Intangible assets acquisition (Note 9) 84,317 – – 84,317
Depreciation and amortisation 226,076 58,721 – 284,797
The Group considers that there is only one geographical segment – Russian Federation and does not pres-
ent information on secondary segments.
7. Balances and Transactions with Related PartiesIn accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has
the ability to control the other party or exercise significant influence over the other party in making financial
or operational decisions or if parties are under common control (this includes parents, subsidiaries and fellow
subsidiaries). In considering each possible related party relationship, attention is directed to the substance of the
relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not enter, and transactions be-
tween related parties may not be effected on the same terms, conditions and amounts as transactions between
unrelated parties.
The nature of the related party relationships for those related parties with whom the Group entered into
transactions or had balances outstanding at 31 December 2007 and 2006 are detailed below.
87annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Balances with related parties:
2007 trade receivablesnote 12
Short-term financial assets
note 14
Cash and cash equivalents note 13 (c)
trade payables, other payables
and accruals – (a)note 17
Other related parties1 – 5,111 168,836 6,990
total – 5,111 168,836 6,990
2006 trade receivablesnote 12
Short-term financial assets
note 14
Cash and cash equivalents note 13 (c)
trade payables, other payables
and accruals – (b)note 17
Other related parties1 18,974 30,264 124,632 824,723
total 18,974 30,264 124,632 824,723
This balance represented obligation for the license fee, described in section “Transactions with related par-(a)
ties” below.
This balance represented obligation for the voting shares of OJSC “TZMOI” originated from their acquisition (b)
in 2005 and 2006 which was fully paid in 2007.
This balance represented cash at a bank controlled by a related party.(c)
Major conditions of the loans included in short-term financial assets above are as follows:
Caption Interest rate % Maturity period
2007 2006 2007 2006
Current loans and deposits to related parties 2% 2% 3 months 1-12 months
Cash balances with related bank carry no interest. Cash equivalents represented by deposits with related
bank carry 9% interest p.a.
1 other related parties represent entities under control of the Company’s shareholders having the significant influence over the Company
88
Transactions with related parties included in the statement of operations:
Statement of operations caption relationship 2007 2006
Sales of medical equipment Other related parties1 – 4,167
License fee (included in distribution costs) (A) Other related parties1 24,522 18,686
Warehouse rental expenses (included in distribution costs) (B) Other related parties1 30,532 19,915
Office rental expenses (included in general and administrative expenses) (B) Other related parties1 14,473 9,494
(A) License fee
Licence fee is paid for use of several trade marks owned by an entity under common control. The license
fee is paid on a quarterly basis as 5% of the licensed products output applying the standard price list of the Group.
(B) Rental expenses
The Group incurred warehouse and office rental expenses to an other related party.
Acquisition of intangible assets
In 2007, the Group acquired an intangible asset (trade mark) for RR 160,000 (2006: RR 84,317) from an other
related party.
Sale of OJSC “Pharmstandard-Octyabr” buildings
In 2006, the Group terminated operations of “Pharmstandard-Octyabr” OJSC. As a result, buildings of
“Pharmstandard-Octyabr” OJSC with the carrying value of RR 103,000 were sold to an other related party in 2006
for cash consideration equal to their carrying value.
Shareholder’s loan for Masterlek acquisition
On 2 August 2006, the Group received a loan from the Company’s shareholder in the amount of US$
146,200 thousand (RR 3,912,385) for CJSC “Masterlek” acquisition (Note 5). The loan attracted interest rate of 12%
per annum.
In December 2006 this shareholder’s loan was refinanced by the syndicated borrowing organised by Cit-
ibank (Note 15). Total interest expense incurred in respect of the shareholder’s loan was RR 176,057.
Compensation to key management personnel
Key management personnel comprise 3 persons as of 31 December 2007 and 2006. Total compensation
to key management personnel, amounted to RR 82,257 for the year ended 31 December 2007 (2006: RR 16,129).
Such compensation represented the following short-term employee benefits: (i) payroll and bonuses included
in general and administrative expenses and (ii) one-off remuneration for achievement of the IPO-related targets
(Notes 18 and 23) included in other expenses in the statement of operations.
89annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
8. Property, Plant and equipment
Property, plant and equipment and related accumulated depreciation consist of the following:
31 December 2007 land Buildings plant and machinery
equipment and motor vehicles
assets under construction
total
cost
Balance at 31 December 2006 37,654 1,813,350 1,933,214 146,531 228,168 4,158,917
Additions 8,059 – 17,598 67,086 391,390 484,133
Transfers to non-current assets classified as held for sale (12,731) – (81,983) (1,408) (79,079) (175,201)
Transfers – – 89,815 10,309 (100,124) –
Disposals – (2,515) (18,817) (15,822) (9,494) (46,648)
Balance at 31 December 2007 32,982 1,810,835 1,939,827 206,696 430,861 4,421,201
Accumulated Depreciation
Balance at 31 December 2006 – 111,325 228,123 30,888 – 370,336
Depreciation charge – 48,890 273,907 34,421 – 357,218
Transfers to non-current assets classified as held for sale – – (13,579) (378) – (13,957)
Disposals – (1,636) (15,686) (8,743) – (26,065)
Impairment charge (a) – – 42,403 – – 42,403
Balance at 31 December 2007 – 158,579 515,168 56,188 – 729,935
Net Book Value
Balance at 31 December 2006 37,654 1,702,025 1,705,091 115,643 228,168 3,788,581
Balance at 31 December 2007 32,982 1,652,256 1,424,659 150,508 430,861 3,691,266
(a) Impaired assets represented equipment for production of needles for syringes which was terminated by the Group due to low profitability. The impairment charge presented in the table equals to the carrying value of that equipment.
90
31 December 2006 land Buildings plant and machinery
equipment and motor vehicles
assets under construction
total
cost
Balance at 31 December 2005 49,101 1,591,342 1,162,705 55,521 689,091 3,547,760
Additions 12,738 – 235,693 71,806 620,357 940,594
Acquisition through business combination (Note 5) – – – 4,851 – 4,851
Transfers – 456,593 590,275 27,869 (1,074,737) –
Disposals (24,185) (234,585) (55,459) (13,516) (6,543) (334,288)
Balance at 31 December 2006 37,654 1,813,350 1,933,214 146,531 228,168 4,158,917
Accumulated Depreciation
Balance at 31 December 2005 – 71,929 109,759 17,144 – 198,832
Depreciation charge – 55,034 146,536 13,929 – 215,499
Transfers – 79 (7,234) 7,155 – –
Disposals – (15,717) (20,938) (7,340) – (43,995)
Balance at 31 December 2006 – 111,325 228,123 30,888 – 370,336
Net Book Value
Balance at 31 December 2005 49,101 1,519,413 1,052,946 38,377 689,091 3,348,928
Balance at 31 December 2006 37,654 1,702,025 1,705,091 115,643 228,168 3,788,581
The Group did not use borrowings to finance capital expenditures, thus no interest expense was capital-
ized in 2007 and 2006.
The Group assets include only a minor portion of the land on which the Group’s factories and buildings,
comprising the Group’s principal manufacturing facilities, are located, whilst the major portion of the land is held
under operating lease agreements with the state municipal bodies (Note 4). The total amount of rental payments
for the use of the land during 2007 was RR 8,382 (2006: RR 7,962). Such payments are assessed by the state author-
ities on an annual basis. No such assessment has been completed for 2008.
91annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
9. Intangible Assets
Goodwill trademarks total
cost
Balance at 31 December 2006 1,180,469 3,362,468 4,542,937
Additions (Note 7) – 165,220 165,220
Balance at 31 December 2007 1,180,469 3,527,688 4,708,157
Accumulated Amortisation
Balance at 31 December 2006 – 69,298 69,298
Amortisation expense – 170,382 170,382
Balance at 31 December 2007 – 239,680 239,680
Net Book Value
Balance at 31 December 2006 1,180,469 3,293,170 4,473,639
Balance at 31 December 2007 1,180,469 3,288,008 4,468,477
Goodwill trademarks total
cost
Balance at 31 December 2005 218,854 2,645 221,499
Additions – 84,317 84,317
Acquisition through business combination (Note 5) 961,615 3,278,151 4,239,766
Disposals – (2,645) (2,645)
Balance at 31 December 2006 1,180,469 3,362,468 4,542,937
Accumulated Amortisation
Balance at 31 December 2005 – – –
Amortisation expense – 69,298 69,298
Balance at 31 December 2006 – 69,298 69,298
Net Book Value
Balance at 31 December 2005 218,854 2,645 221,499
Balance at 31 December 2006 1,180,469 3,293,170 4,473,639
92
Impairment testing of goodwill
Goodwill acquired through business combinations before 2007 has been allocated for impairment testing
purposes to the following groups of cash-generating units, which are also reportable segments of the Group:
production and wholesale of pharmaceutical products group of units (“Pharmaceuticals”); and ■
production and wholesale of medical equipment group of units (“Equipment”). ■
Carrying amount of goodwill allocated to each group of cash generating units:
pharmaceuticals equipment total
2007 2006 2007 2006 2007 2006
Carrying amount of goodwill 961,615 961,615 218,854 218,854 1,180,469 1,180,469
The recoverable amount of the cash-generating units has been determined based on a value in use cal-
culation using cash flow projections based on financial budgets approved by management covering a five-year
period and cash flows beyond the five-year period are extrapolated using a 20% and 5% growth rate that is the
same as the mid-term average growth rate for Pharmaceuticals and Equipment groups of cash-generating units,
respectively. The discount rate applied to cash flow projections is 13%.
Key assumption used in value in use calculations
The calculation of value in use for both Pharmaceuticals and Equipment groups of cash-generating units
are most sensitive to the following assumptions:
Discount rates; ■
Raw material price inflation; ■
Growth rate used to extrapolate cash flows beyond the budget period. ■
Discount rates - Discount rates reflect management’s estimate of the risks specific to each group of units.
This is the benchmark used by management to assess operating performance and to evaluate future investment
proposals. In determining appropriate discount rates for each group of units, regard has been given to the inter-
bank interest rate approved by Central Bank of Russian Federation at the beginning of the budgeted year.
Raw material price inflation – past actual raw materials price movements have been used as an indicator of
future price movements.
Growth rate estimates – Rates are based on published industry research.
Sensitivity to changes in assumptions
Management believes that no reasonably possible change in any of the above key assumptions would
cause the carrying value of the group of units to materially exceed its recoverable amount.
10. non-current Assets classified as Held for Sale
The Company’s management approved a plan to dispose “TMK” LLC in 2007. “TMK” LLC represents a minor
part of the medical equipment and disposables business segment with a total net assets (primarily property, plant
and equipment) of RR 164,101. The fair value less the cost of sale of “TMK” LLC is estimated based on the selling
price, preliminarily agreed with a third party, amounting to RR 140,000 (Note 28). A loss on non-current assets
classified as held for sale amounting to RR 24,101 was recognised in the statement of operations (Note 23).
93annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
The remainder of the non-current Assets Classified as Held for Sale amounting to RR 18,855 represent
some non-current assets located in St-Petersburg where the Group terminated production operations in 2006.
The Group has approved plan for their disposal.
Non-current assets classified as held for sale reflected in the balance sheet as of 31 December 2006
amounting to RR 22,655 were sold in February 2007 for a cash consideration of US$ 1,311 thousand (RR 34,133).
11. InventoriesInventories consist of the following:
2007 2006
Raw materials - at cost 841,703 748,619
Work in progress - at cost 134,554 96,948
Finished goods:
- at cost 851,052 596,992
- at net realisable value 783,938 561,385
1,760,195 1,406,952
The amount of write-down of inventories recognised as an expense in 2007 is RR 43,224 (2006: RR 32,606).
This expense is included in the cost of sales line item as a cost of materials and components, which is disclosed in
Note 20.
12. Trade Receivables
2007 2006
Trade receivables (net of allowance for impairment of receivables of RR 167,933 (2006: RR 79,308)) 4,176,200 3,373,741
4,176,200 3,373,741
At 31 December 2007 RR 129,304 of trade receivables were denominated in currencies other than Russian
Roubles, primarily in US$ (2006: RR 68,549).
94
Movements in allowance for impairment of trade receivables consist of the following:
2007 2006
Balance at 1 January 79,308 83,049
Additional allowance 95,483 10,596
Written off during the year (6,858) (14,337)
Balance at 31 December 167,933 79,308
13. Cash and Cash EquivalentsCash and cash equivalents consist of the following:
2007 2006
Cash in bank – Russian Roubles 119,126 158,239
Cash in bank – US$ and Euro 13,463 34,727
Short-term bank deposits with original maturity less than 90 days – Russian Roubles 60,000 –
192,589 192,966
Short term deposits carry interest at 9% per annum.
14. Financial AssetsShort-term financial assets
2007 2006
Promissory notes 81,300 34,466
Loans to related parties (Note 7) 5,111 30,264
Trading securities and other 25,488 40,136
111,899 104,866
Long-term financial assets
2007 2006
Non-listed shares 245,398 –
245,398 –
In December 2007, the Group acquired 19.88% of “Dipaka Trading Limited”, a company registered under
the laws of Cyprus, for cash consideration of US$10 million (RR 245,398). This company is the sole shareholder of
the Russian company “Mirpharm” which is involved in pharmaceutical production and distribution and research-
ing. Also, “Dipaka Trading Limited” owns several medical patents and trade marks.
95annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
15. Borrowings and Loans
2007 2006
Long-term borrowings and loans
(a) Syndicated borrowing organised by Citibank (“Citibank loan”) 3,256,151 3,844,341
(b) Other loans 8,799 31,071
Less: Current portion of long-term borrowings and loans (1,310,374) (351,415)
1,954,576 3,523,997
Long-term debt is repayable as follows:
2007
1 to 2 years 1,319,198
2 to 3 years 317,628
3 to 4 years 317,750
1,954,576
As at 31 December 2007 and 2006 all the borrowings are US$ denominated. The foreign exchange risk in
this respect is not covered by any derivative instruments.
(a) The Citibank loan was provided in December 2006 in two credit facilities:
Facility A in the total amount of US$ 91 million with maturity period of 3 years; and ■
Facility B in the total amount of US$ 55 million with maturity period of 5 years. ■
Interest rate for facility A was established as 3 month LIBOR plus margin of 1.50% p.a.
Interest rate for facility B was established as 3 month LIBOR plus margin of 1.90% p.a.
In September 2007, when LIBOR rate interest was approximately 5.7%, the Group entered into an Interest
Rate Swap agreement in respect to all interest payments due in respect to the Citibank loan basically swapping
the LIBOR rate interest obligations into a fixed rate of 4.932% per annum. In this manner the Group protect itself
against fluctuations of LIBOR rates. For more details see Note 27.
In addition to interest, the Group is obliged to reimburse mandatory administrative costs, if any incurred by
Citibank in connection with the Citibank loan.
The Citibank loan is secured by guarantees issued by all the Group’s subsidiaries.
The Citibank loan agreement establishes certain financial ratios, restrictions on disposal of assets and distri-
bution of dividends.
96
In 2007, the Group repaid US$ 13,346 thousand (RR 329,726) of the Citibank loan.
(b) Other loans mature in September 2009 and bear fixed interest rate 7% per annum.
16. Other Taxes PayableTaxes payable, other than income tax, are comprised of the following:
2007 2006
Value-added tax 157,585 112,482
Property and other taxes 55,221 35,977
212,806 148,459
17. Trade and Other Payables and Accruals
2007 2006
Trade payables 766,007 1,071,596
Other payables – related party (Note 7) 6,990 824,723
Other payables and accruals 273,523 196,563
1,046,520 2,092,882
At 31 December 2007 RR 274,167 of trade payables were denominated in currencies other than Russian
Rouble, primarily in US$ (2006: RR 414,022).
18. Share CapitalIn accordance with its charter documents the share capital of the Company is RR 37,793. The authorised
number of ordinary shares is 37,792,603 with par value of 1 (one) Russian Ruble. All authorised shares are issued
and fully paid. There were no transactions with own shares during 2007.
As at 31 December 2007 and 2006 more than half of voting shares of OJSC “Pharmstandard” were held by
“Augment Investments Limited” (“Augment”), a company registered under the laws of Cyprus. None of Augment
participants held more than 50% interest in the Company and as a result no individual party ultimately controlled
the Group as at 31 December 2007 and 2006 (Note 28).
In May 2007, 16,349,408 ordinary shares representing 43.3 percent of share capital of the Company were
sold by Augment to public investors as a result of the Initial Public Offering conducted simultaneously at Russian
stock exchanges (RTS and MICEX) where 18.3 percent of the shares were offered and at London stock exchange
(LSE) where the remaining 25 percent were offered.
In accordance with Russian legislation, dividends may only be declared from accumulated undistributed
and unreserved earnings as shown in Russian statutory financial statements. The Company had approximately RR
3,782,223 of undistributed and unreserved earnings as at 31 December 2007 (2006: RR 2,114,304). In addition, the
97annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Company’s share in the undistributed and unreserved earnings of the subsidiaries was approximately RR 7,698,340
as at 31 December 2007 (2006: RR 5,938,296).
In accordance with the Citibank loan agreement (Note 15) the Group shall not pay, make or declare any
dividend or other distribution without the prior written consent of the lenders.
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the
weighted average number of ordinary shares in issue during the period. The Group has no dilutive potential ordi-
nary shares; therefore, the diluted earnings per share equal basic earnings per share.
earnings per Share
Earnings per share calculated retrospectively are as follows:
2007 2006
Weighted average number of ordinary shares outstanding 37,793,603 37,793,603
Profit for the year attributable to the shareholders 3,227,895 1,897,671
Basic and diluted earnings per share, Russian Roubles 85.41 50.21
98
19. Revenue - Sale of GoodsThe Group’s products are divided into pharmaceuticals, including products sold in the OTC (“Over-the-
counter”) market or with a prescription, and medical equipment and disposables.
Sales breakdown by product groups comprised the following:
product group 2007 2006
Pharmaceutical products
OTC
Branded 7,547,567 5,340,643
Non-branded 687,630 690,844
8,235,197 6,031,487
Prescription
Branded 1,207,026 899,273
Non-branded 265,836 299,240
1,472,862 1,198,513
Other 54,578 96,380
total pharmaceutical products 9,762,637 7,326,380
Medical equipment and disposables 1,608,708 1,196,400
11,371,345 8,522,780
20. Cost of SalesThe components of cost of sales were as follows:
2007 2006
Materials and components 2,997,475 2,360,659
Production overheads 815,557 757,616
Depreciation and amortisation 481,309 260,285
Direct labour costs 225,408 202,677
4,519,749 3,581,237
99annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
21. Selling and Distribution CostsSelling and distribution costs were as follows:
2007 2006
Advertising 753,580 665,108
Labour costs 397,082 215,607
Freight, communication and insurance of goods in transit 126,817 129,831
Utilities and other services 27,031 17,428
Certification expenses 29,092 32,300
Rent 35,211 39,593
Commission and license fee 105,681 75,922
Materials and maintenance 43,430 28,587
Travel and entertainment 43,986 23,397
Depreciation 27,920 10,485
Other expenses 36,211 29,902
1,626,041 1,268,160
The Group entered into a number operating lease agreements for warehouses. Rental agreements are
revised on an annual basis. Future minimum operating lease payments classified as selling and distribution costs
will not substantially change in 2008 compared to 2007.
100
22. General and Administrative ExpensesGeneral and administrative expenses were as follows:
2007 2006
Labour costs 356,500 288,016
Utilities and services 48,050 87,637
Taxes other than income tax 17,589 18,362
Property insurance 13,481 15,772
Freight and communication 20,142 16,159
Depreciation 18,371 14,027
Rent 34,286 22,534
Materials and maintenance 19,745 11,005
Other 42,355 25,417
570,519 498,929
The Group entered into a number operating lease agreements for office premises. Rental agreements are
revised on annual basis. Future minimum operating lease payments classified as are general and administrative
expense will not substantially change in 2008 compared to 2007.
23. Other Income and Other ExpensesOther income comprised the following:
2007 2006
Gain from sale of non-current assets classified as held for sale (Note 10) 11,478 –
Gain from disposal of property, plant and equipment and investments property 3,566
Foreign exchange gain 259,098 –
274,142 –
101annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Other expenses comprised the following:
2007 2006
Impairment of equipment (Note 8) 42,403 –
Legal, audit, one-off management remuneration (Note 7) and other non-recurring expenses incurred in connection with IPO (Note 18) 110,016 –
Loss from disposal of property, plant and equipment – 160,145
Charity 4,114 13,082
Other taxes 56,381 32,027
Write-off other short-term financial assets 13,657 –
Loss recognised on non-current assets classified as held for sale (Note 10) 24,101 –
Other 64,919 1,742
315,591 206,996
24. Financial Income and ExpenseFinancial income and expense comprised the following:
2007 2006
Interest income:
Income from changes of fair value of financial assets recognised in the statement of operations 10,578 –
Income from Interest Rate Swap (Notes 15 and 27) 6,790 –
Interest income from loans and deposits 11,361 23,987
28,729 23,987
Interest expense:
Expense from changes in fair value of the Interest Rate Swap (Notes 15 and 27) 44,598 –
Interest expenses on finance lease – 18,356
Interest expense on borrowings and loans 275,769 273,007
320,367 291,363
102
25. Income Tax
2007 2006
Income tax expense – current 1,106,218 811,991
Correction of prior periods after reconciliation with tax authorities (a) (14,480) –
Deferred tax expense – origination and reversal of temporary differences (33,029) (147,977)
Income tax expense 1,058,709 664,014
(a) The Group identified overpayment of income tax in prior periods as a result of routine reconciliation with
tax authorities. As a result, the respective receivable from the budget was recognised.
Income before taxation for financial reporting purposes is reconciled to tax expense as follows:
2007 2006
Profit before income tax 4,321,949 2,700,082
Theoretical tax charge at statutory rate of 24% 1,037,268 648,020
Correction of prior periods after reconciliation with tax authorities (14,480) –
tax effect of items which are not deductible or assessable for taxation purposes:
Interest rate swap 10,704 –
Non-deductible expenses and other 25,217 15,994
Income tax expense 1,058,709 664,014
Movements in deferred tax balances were as follows:
31 December 2005
Differences recognition
and reversal
effect of business
combination in 2006
(note 5)
31 December 2006
Differences recognition
and reversal
31 December 2007
tax effects of deductible temporary differences – asset (liability):
Property, plant and equipment (Note 8) (375,982) 34,994 – (340,988) (19,371) (360,359)
Intangible assets (Note 9) – 64,990 (786,756) (721,766) 24,740 (697,026)
Trade and other receivables (51,646) 6,689 – (44,957) 49,356 4,399
Inventories (13,835) 17,522 (3,482) 205 (18,483) (18,278)
Trade and other payables – 18,628 2,896 21,524 (1,868) 19,656
Other – 5,154 – 5,154 (1,345) 3,809
total net deferred tax liability (441,463) 147,977 (787,342) (1,080,828) 33,029 (1,047,799)
103annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
The recognition and reversals of temporary differences primarily relates to the following:
depreciation of property, plant and equipment in excess of the depreciation for tax purposes; ■
fair value adjustments on acquisition; ■
impairment of trade receivables; ■
provisions to write inventory down to net realizable value; ■
amortisation of trade marks in excess of the amortisation for tax purposes; and ■
deemed cost adjustments upon conversion to IFRS. ■
The aggregate amount of temporary differences associated with investments in subsidiaries for which
deferred tax liabilities have not been recognised was approximately RR 7,698,340 as at 31 December 2007 (2006:
RR 5,938,296).
26. Contingencies, Commitments and Operating Risks
Operating environment of the group
Whilst there have been improvements in the Russian economic situation, such as an increase in gross
domestic product and a reduced rate of inflation, Russian Federation continues economic reforms and devel-
opment of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the
Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic,
financial and monetary measures undertaken by the government.
taxation
Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can
occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of
the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian
Federation suggest that the tax authorities are taking a more assertive position in its interpretation of the legisla-
tion and assessments and as a result, it is possible that transactions and activities that have not been challenged
in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. Fiscal
periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of
review. Under certain circumstances reviews may cover longer periods.
As at 31 December 2007 management believes that its interpretation of the relevant legislation is appro-
priate and that the Group’s tax, currency and customs positions will be sustained.
Because of the uncertainties associated with the Russian tax and legal systems, the ultimate amount of
taxes, penalties and interest assessed, if any, may be in excess of the amount expensed to date and accrued as of
104
31 December 2007. It is not practical to determine the amount of unasserted claims that may manifest, if any, or
the likelihood of any unfavourable outcome. Should the Russian tax authorities decide to issue a claim and prove
successful in the court, they would be entitled to recover the amount claimed, together with fines amounting to
20% of such amount and interest at the rate of 1/300 of the Central Bank of Russian Federation rate for each day
of delay for late payment of such amount. Management believes that it is not probable that the ultimate outcome
of such matters would result in a liability. Therefore, no provision for these contingencies was recorded in the ac-
companying financial statements.
Insurance policies
The Group holds insurance policies in relation to its property, plant and equipment, which cover majority
of property, plant and equipment items. The Group holds no insurance policies in relation to its operations, or in
respect of public liability.
27. Financial Instruments and Financial Risk Management Objectives and Policies
fair values
Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s finan-
cial instruments except trade receivables and trade and other payables. Management believes that fair value of
trade receivables and trade and other payables equal their carrying value.
2007 2006
Fair value net carrying value
Fair value net carrying value
Financial assets
Cash and cash equivalents (Note 13) 192,589 192,589 192,966 192,966
Short-term loans to related parties (Note 7) 5,111 5,111 30,264 30,264
Promissory notes (Note 14) 81,300 81,300 34,466 34,466
Other short-term investments(Note 14) 25,488 25,488 40,136 40,355
Long-term investment in non-listed shares (Note 14) 245,398 245,398 – –
Financial liabilities
Borrowings and loans (Note 15) 3,264,950 3,264,950 3,875,412 3,875,412
Derivative financial instruments 44,598 44,598 – –
Other non-current liabilities 36,826 36,826 47,767 47,767
Fair values of long-term borrowings and loans are approximately equal to their carrying value as they are
based on variable interest rates (LIBOR). Fair value of other non-current liabilities and derivative financial instru-
ments (see below) has been calculated by discounting the expected future cash flows at prevailing interest rates.
105annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
Fair value of long-term investment in non-listed shares has been determined by reference to its recent purchase
price (see Note 14). Fair values of other items above approximate their carrying amounts due to their short
maturity.
financial risk management objectives and policies
The Group’s principal financial instruments comprise bank loans and cash and cash equivalents. The main
purposes of these financial instruments are to raise finance for the Group’s operations and investment activities.
The Group has various other financial assets and liabilities such as promissory notes, trade receivables and trade
payables, which relate directly to its operations. During the year the Group did not undertake active trading in
financial instruments. To reduce the risk of interest fluctuations related to long term LIBOR borrowings, the Group
entered into an interest rate swap agreement (more details see below).
The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign
currency risk and credit risk. Management reviews and agrees policies for managing each of these risks which are
summarised below.
Interest rate risk
The Group is exposed to interest rate risk through interest cash flow and market value fluctuations as the
majority of interest rates on long-term borrowings are floating and based on LIBOR as disclosed in Note 15.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all oth-
er variables held constant, of the Group’s profit before tax for one year assuming the parallel shifts in the yield curves
(through the impact on floating rate borrowings and changes in fair value in respect of the Interest Rate Swap):
Increase/decrease in basis points
effect on statement of operations (interest
expense), uS$ thousand
effect on statement of operations (due to
fair value change), uS$ thousand
As at 31 December 2007
US Dollar 200 (2,653) 2,093
US Dollar (200) 2,653 (3,288)
As at 31 December 2006
US Dollar 200 (2,920) –
US Dollar (200) 2,920 –
106
foreign exchange risk
The Group has US$ denominated long-term borrowings (see Note 15) and also certain US$ denominated
trade payables (Note 17) and trade receivables (Note 12). Therefore, the Group is exposed to foreign exchange risk.
The Group monitors the foreign exchange risk by following changes in exchange rates in the currencies in
which its cash, payables and borrowings are denominated. However, the Group does not have formal arrange-
ments to mitigate this foreign exchange risk.
The table below shows the sensitivity to a reasonably possible change in the US dollar exchange rate, with
all other variables held constant, of the Group’s profit before tax:
Increase/decrease in uS$ rate
effect on profitbefore tax, rr
As at 31 December 2007
US$/Roubles exchange rate +7% (233,902)
US$/Roubles exchange rate -7% 233,902
As at 31 December 2006
US$/Roubles exchange rate +7% (291,473)
US$/Roubles exchange rate -7% 291,473
liquidity risk
The Group’s policy is to maintain sufficient cash and cash equivalents or have available funding through
an adequate amount of committed credit facilities to meet its operating and financial commitments. The Group
performs continuous monitoring of cash deficit risks and continuous monitoring of repayment of its financial li-
abilities on time. The Group performs daily planning and control cash flow procedures.
The table below summarises the maturity profile of the Group’s non-derivative financial liabilities based on
contractual undiscounted payments including interest except for trade payables which normally have maturity
periods shorter than 90 days.
as at 31 December 2007 total less than3 months
3 to6 months
6 to12 months
1 to 5 years
Borrowings (a) 3,709,520 379,335 379,335 758,669 2,192,181
Other non-current liabilities 79,825 – – 12,347 67,478
total 3,789,345 379,335 379,335 771,016 2,259,659
107annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
notes to the consolidated financial Statements (continued)
(All amounts are in thousands of Russian Roubles, if not otherwise indicated)
as at 31 December 2006 total less than3 months
3 to6 months
6 to12 months
1 to 5 years
Borrowings (a) 4,525,693 67,427 67,427 486,268 3,904,571
Financial liabilities (b) 824,723 389,770 434,953 – –
Other non-current liabilities 99,110 – – 11,665 87,446
total 5,449,526 457,197 502,380 497,933 3,992,017
(a) The Citibank loan received in 2006 (see Note 15 for details) is including contractual principal amount of a
debt and interests at the LIBOR rate interest calculated at 31 December 2007 and 2006.
(b) This balance represents the obligation for the voting shares of OJSC “TZMOI” originated from their acquisi-
tion in 2005 and 2006 which was fully paid in 2007 (see Note 7).
credit risk
Financial assets, which potentially are subject to credit risk, consist principally of trade receivables. The
Group has policies in place to ensure that sales of products and services are made to customers with an appropri-
ate credit history. Sales to customers are made in accordance with annually approved Marketing and Credit policy.
The Group regularly monitors sales and receivables conditions using effective internal control procedures.
The carrying amount of accounts receivable, net of allowance for impairment of receivables, represents
the maximum amount exposed to credit risk. Although collection of receivables could be affected by economic
factors, management believes that there is no significant risk of loss to the Group beyond the allowance already
recorded.
Cash is placed in financial institutions, which are considered at time of deposit to have minimal risk of
default.
The table below summarises the Group’s trade receivables aging. The allowances for doubtful accounts is
allocated on aggregate basis with the Group’s allowances for doubtful accounts policy (see Note 4).
total neither impaired nor
past due
not impaired but past due
less 1 month
1-2 months 2-3 months 3 to6 months
> 6 months
31 December 2007 4,176,200 3,240,772 792,664 66,548 49,989 22,335 3,892
31 December 2006 3,373,741 2,682,810 340,278 109,186 60,650 156,240 24,577
108
Sales concentration to a small group of customers
The Group works with five distributors that together represent about 50% of the Group’s revenue for 2007
and 2006. Given the Russian market structure limited number of large distributors is not unusual and due to the
strong relationships with these distributors, management considers the related credit risk concentration as nor-
mal. The Group has no other significant concentrations of credit risk.
capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going
concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the
cost of capital. The Group manages its capital structure and makes adjustments to it, in light of changes in eco-
nomic conditions. To maintain or adjust the capital structure, the Group may adjust the amount of dividends paid
to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt (while taking into
consideration terms and conditions set by the Citibank Loan Agreement, Note 15).
The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt.
The Group’s policy is to keep the gearing ratio not more than 60%. The Group includes within net debt borrow-
ings and loans, trade and other payables less cash and cash equivalents. Capital includes equity attributable to the
equity holders of the parent.
2007 2006
Borrowings and loans 3,264,950 3,875,412
Trade and other payables 1,046,520 2,092,882
Less: cash and cash equivalents (192,589) (192,966)
Net debt 4,118,881 5,775,328
Equity 9,041,814 5,876,699
Capital and net debt 13,160,695 11,652,027
gearing ratio 31% 50%
28. Post Balance Sheet Events
Ultimate controlling party
On 26 March 2008, Victor Kharitonin, a Russian citizen obtained control over more than a half of voting
shares of the Company. Therefore he became the Group’s ultimate controlling party since that date.
Sale of non-current assets
The non-current assets classified as held for sale carried in the balance sheet as at 31 December 2007 in
the amount of RR 140,000 and represented by TMK LLC (Note 1), were sold in March 2008 for cash consideration
of RR 140,000.
109annual report 2007 | \\... NotES to thE coNSolIDAtED FINANcIAl StAtEMENtS
110
our production capacity of 1,3 billion packs is one of the largest among domestic pharmaceutical companies in russia. each of our five modern manufacturing facilities is certified to be compliant with russian good manufacturing practice (“GMp”) standards.
contacts05
111annual report 2007
OJSC “Pharmstandard-Leksredstva”, Kursk
OJSC “Pharmstandard”, Moscow
LLC “Pharmstandard-Phitofarm- NN”, Nizhny Novgorod
OJSC “Pharmstandard-Ufavita”, Ufa OJSC “Pharmstandard-Tomskhimpharm”, Tomsk
OJSC “TZMOI”, Tyumen
On any questions, please, contact us by e-mail or by regular mail with the following details:
5 ‘B’ Likhachevsky proezd, Dolgoprudny town, Moscow region, Russia, 141700, OJSC “Pharmstandard”
e-mail: [email protected]
phone: +7 (495) 970 00 30
fax: +7 (495) 970 00 32
112
